Mortgage rates to soar even high after latest Bank of Canada rate hike

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Major banks raise interest rates from 5.95% to 6.45%

Publication date:

07.12.2022 • 2 days ago • 3 minutes read 13 comments Sales and prices are slipping, but homes are not becoming more affordable for prospective buyers. Sales and prices are slipping, but homes are not becoming more affordable for prospective buyers. Photo by Peter J. Thompson/National Post

The Bank of Canada’s half-point rate hike on Wednesday spells more trouble for indebted homeowners and those trying to get into the housing market, who must now contend with even higher mortgage rates and borrowing costs.

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After the rate hike, the Royal Bank of Canada was the first of the Big Six banks to raise its policy rate from 5.95 percent to 6.45 percent. Toronto-Dominion Bank, Bank of Montreal, Scotiabank, National Bank of Canada, CIBC, Equitable Bank and Laurentian Bank also hiked lending rates to 6.45 percent on Wednesday afternoon effective December 8.

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However, economists highlighted a silver lining that the recent outsized rate hike – which brought the central bank’s benchmark policy rate to 4.25 percent – could signal the end of the rate-hike cycle.

As housing markets feel the impact of rising interest rates, which are now up 400 basis points this year, none have been hit harder than Toronto and Vancouver. Toronto home prices fell again in November, down just over 7 percent to about $1.08 million, as home movers fell 49 percent year-on-year. Vancouver fared no better, with sales plummeting more than 50 percent in November and the benchmark home price falling from October.

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As sales and prices fall, homes are not becoming more affordable for potential buyers.

Victor Tran, mortgage and real estate expert at Ratesdotca, said this latest move by the central bank would likely push the policy rate offered by the big banks to 6.45 percent. Tran also said that for every 50 basis point increase, a homeowner with an adjustable rate mortgage can expect a monthly increase of about $28 per $100,000 of mortgage amount.

We may see the bottom of the housing market bottom before buyers enter the market in spring 2023

Viktor Tran

“Previous rate hikes have significantly cooled the housing market, while rising rates have marginalized many homebuyers, including first-time buyers and investors, to await market instability,” Tran said, adding that Wednesday’s rate hike will do the same. “We may see the bottom of the housing market bottom before buyers enter the market in spring 2023.”

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The Bank of Canada is already seeing the impact of the rising interest rate environment on mortgage holders. The most recent central bank data showed that about 50 percent of adjustable-rate and fixed-rate mortgages, and nearly 13 percent of Canada’s entire mortgage pool, have already reached their “trigger rates,” or the point where monthly mortgage payments just cover interest and comes along not ahead of the principal amount.

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There is good news for home seekers. Clay Jarvis, mortgage and real estate expert at personal finance website NerdWallet Canada, said that while the road to home ownership may have gotten a bit steeper following this announcement, it shouldn’t be a deal-breaker.

“The good news for homebuyers is that the Bank of Canada may be nearing the end of its rate hikes,” Jarvis said. “The overnight rate could rise further in January and March, but if the bank really believes that inflation will fall again by about 3% by the end of 2023, they also have to assume that the increases they make will have a noticeable impact in the early to middle stages of the next year. Once inflation reverses, rate hikes should stop.”

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The Royal Bank of Canada economics team also noted that the Bank of Canada’s policy statement that accompanied the rate hike was not as hawkish as the hike itself.

“Rather than proposing that ‘key interest rates need to rise further’, today’s forecast is that ‘the Governing Council will consider whether key interest rates need to rise further,'” wrote Josh Nye, senior economist at RBC Economics. “Clearly that opens the door for a pause as early as the next meeting in January and in our view that decision is set between zero and 25 (basis points).”

• Email: [email protected] | Twitter: StephHughes95

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