An even bigger rate hike is expected on Wednesday – and housing will take another hit, experts say


The widely expected Bank of Canada interest rate hike on Wednesday will be bad news for homeowners who could see their mortgage rates go up as their property values ​​fall.

The economic data reflects a tumultuous time for the Canadian economy, with inflation hitting a 39-year high of 7.7% in May and recent central bank polls showing low consumer confidence.

Bay Street analysts generally expect the Bank of Canada to raise its key rate by 0.75 percentage points on Wednesday, raising its key rate to 2.25% in a bid to slow rapid consumer price growth.

These rates may seem low by historical standards – the central bank’s policy rate was typically above 2% until the 2008 financial crisis – but the pace at which rates are now being raised is the fastest in decades, part of an aggressive campaign to slow consumer demand that some economists say could tip the country into a recession.

The impact of the bank’s tightening campaign is already being felt in the housing market, where prices have fallen about 13% since February, according to the Canadian Real Estate Association.

The higher the rates, the harder it is to borrow money, which means potential buyers will have a harder time financing down payments while current owners will be paying more on their mortgages.

“A 75 basis point increase will slow down buying even more,” said Sung Lee, a licensed mortgage agent at rates.ca. “We are already seeing people walking away from housing offers. The mindset has changed. »

Homeowners who have taken out historically low five-year fixed-rate mortgages over the past five years are now likely to face higher rates when their mortgages come up for renewal, Lee said.

According to ratehub.ca, a homeowner with a five-year fixed rate mortgage of 1.99% on a $500,000 home, amortized over 25 years, has a monthly mortgage payment of $2,155. If their mortgage rate increases by 2% to 3.99%, their monthly payments will be approximately $2,528.

When the overnight rate increases, the effects are felt immediately by some, such as variable rate and HELOC mortgage holders, but will be felt by others much later when they take out a new mortgage or renew it,” Lee said.

The typical rate for a home equity line of credit (HELOC), a loan secured by the borrower’s home and typically with lower interest rates, is expected to rise from around 4.2% to nearly 5 %, said Rob McLister. , a mortgage strategist.

“We’ll see more budget-strapped borrowers making interest-only payments,” McLister said.

The housing market is at the heart of major inflationary pressures in Canada, where the price of typical homes has jumped more than 50% as historically low interest rates have sparked frenzied consumer demand during the pandemic.

But high inflation, fueled in large part by energy and food prices, prompted Bank of Canada Governor Tiff Macklem and his team to take a tougher stance. Today’s inflation rates are well above the bank’s 2% target, an ominous reminder of soaring inflationary pressures in the 1970s and 1980s.

Today, the central bank is trying to reduce inflation without cratering the economy – a tricky maneuver known as a “soft landing” that has little precedent in the history of Canadian monetary policy.

In model scenarios released by the Canada Mortgage and Housing Corporation (CMHC) on Monday, the federal agency said it expects Canadian housing markets to experience a slowdown by mid -2023.

In a moderate interest rate scenario, where rates only rise an additional 0.5%, house prices will fall by around 3% by mid-2023, while national home sales will decline. 29%, the agency said. In a higher interest rate scenario, where the bank’s overnight rate rises to 3.5%, home prices fall by 5% while home sales fall by 34%.

“This is a confusing time for many owners and future owners. What is important to understand is that interest rates are cyclical. At some point over the next few years, we will see them come back down. In the meantime, they’re still on the rise and we just have to plan as best we can,” Lee said.

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