Bank of Canada raises key rate for the first time since October 2018
How will this affect interest on mortgages and consumer loans?
The key rate increase was warned in early February. So far it has only been raised to 0.5%. Before the pandemic, the rate was 1.75%; the Bank of Canada cut it to 0.25% in 2020 to support the economy.
An increase in the key rate at which the Bank of Canada lends to other banks means that the country's major banks will also raise their prime lending rates. Mortgages with variable (floating) interest rates tied to the benchmark will become more expensive. Other banks have already begun to respond, with Royal Bank raising its prime lending rate from 2.45% to 2.7%, starting tomorrow.
In early 2022 there was record annual price increases, presumably caused by the impact of the COVID-19 pandemic on the Canadian economy. In addition, the overall increase in global inflation is influenced by the military conflict between Russia and Ukraine, which has already triggered a rise in oil prices and made the global market unstable. We expect commodity supply disruptions around the world. So there is a good chance that there will be another key rate hike on April 13, 2022.
How will this affect the buyer of real estate on credit? CBCNews.ca gives an example. Let's say a person who wants to buy a house for $500,000 CAD gets approved by a bank for a $400,000 CAD mortgage loan. If the person has a good credit history, they can now easily get a 25-year loan with a variable rate of about 1% and pay $1,507 CAD per month. If the Bank of Canada raises its key rate by 0.25 percent five times this year, economists predict, the monthly payment will rise to $1,842 CAD a month — almost $300 CAD more.
Other figures are provided by Cannex, a Toronto-based financial analysis company. The average variable rate at all major Canadian lenders is 2.26%, but a borrower with a good credit history can get a variable rate mortgage at 1.25%. The average price of a home in Canada is about $748,500 CAD. If you take out a mortgage now with a 1.25% rate and a down payment of 10%, the mortgage payment will be $2,696 CAD. After increasing the mortgage rate by just 0.25%, the payment will rise to $2,776 CAD, a difference of $80 CAD.
Those Canadians whose bank will not raise their monthly payments so sharply will have longer to repay their loan: the percentage of interest in the monthly payment will increase with each increase in the Bank of Canada's key rate. About half of the borrowers have these terms in their contracts.
