As central bankers seek to temper levels of inflation not seen in decades, a series of sweeping monetary policy decisions announced on Wednesday are poised to raise the cost of borrowing for consumers and chill a housing market. burning that has jumped more than 50% since the COVID-19 pandemic began.
Governor Tiff Macklem and his team of economists, who have launched plans to double the bank’s overnight interest rate from 0.5% to 1%, are also warning Canadians that another rate hike “vigorous” could come as early as June, when the Bank of Canada is expected to announce its next rate decision.
For many consumers, these increases mean that interest payments on outstanding debt are likely to increase as mortgages, student loans, lines of credit on car purchases and the like become more and more expensive.
“Higher and faster rate increases will affect mortgage affordability for a large population of homebuyers,” said Sung Lee, mortgage broker and analyst at Rates.ca, after the announcement.
The central bank said housing market activity “which has been unusually high, is expected to moderate.”
The hike may not seem like much – given historic rates which, until the 2008 financial crisis, were typically above 2% – but the bank’s move marks its most aggressive hike since May 2000, when bankers centrals sought to tame the frenetic pace of the economic situation. growth at the turn of the millennium.
The policy is designed to reduce demand by making it increasingly expensive (and, for some consumers, prohibitively expensive) to borrow money from banks and other financial institutions. The same thinking applies to businesses, which will now pay more on loans used to fund venture capital.
Already, rising mortgage costs appear to have started to cool home prices, which have risen more than 50% during the pandemic.
“Major banks have already raised fixed rates several times in recent weeks, with some approaching the 4% mark for uninsured products,” Lee said.
Canadians have gone on an epic mortgage binge during the pandemic, pushing national household debt to a record $2.5 trillion by the end of 2021.
Nearly 40% of Canadian mortgage holders will need to renew their mortgage within the next two years, a recent survey from Mortgage Professionals Canadawhich means that these holders’ payments are likely to increase due to recent rate hikes.
According to Ratehub.ca’s mortgage payment calculator, a homeowner who put down 10% on an $800,000 home with a five-year variable rate of 1.15% (amortized over 25 years) is currently making a monthly mortgage payment of $2,847.
Under the Bank of Canada’s 0.5% increase, the homeowner’s monthly mortgage payment will increase to $3,019, meaning the homeowner will be paying $2,064 more per year on their mortgage.
Among those who will bear the brunt of the rate hikes are potential first-time home buyers who must pass the federal government’s so-called “stress test” to qualify for a government-backed mortgage. The test requires mortgage applicants to prove they can afford higher interest rates in order not to default.
Mortgage rates are now high enough that many potential buyers will need to qualify at percentages above the stress test, which is currently 5.25% or 2% above the rate offered, whichever is higher, a noted Lee.
“As mortgage rates rise, not only will borrowing costs become more expensive, but it may also mean that potential buyers qualify at a rate above the current stress test of 5.25%,” he said. she declared.
The most vulnerable consumers to grapple with higher rates are those who have taken out large loans on home equity lines of credit, also known as HELOCs. The popular and easy-to-access loan, which combines a mortgage with a secured line of credit, can cover up to 80% of the value of a borrower’s home, and it now accounts for a significant portion of overall mortgage debt Canadian households.
While reducing housing demand, experts noted that rate hikes will not solve an affordability crisis in the market; unexpectedly, it will more likely exacerbate it as the cost of borrowing rises beyond the reach of many potential first-time buyers.
“If you were planning to buy in this market, it would have been better if you had done so yesterday,” said Philip Cross, senior economist and researcher at the Macdonald-Laurier Institute.
“It will cost a lot more in 30 or 60 days. At one point, these kinds of increases halted demand. »
Students with outstanding post-secondary debt, especially those with variable-rate loans, as well as average Canadians paying off a loan for a new car or SUV, may also face higher payments in the future.
The best thing for Canadians in debt, for those who can, is to pay off outstanding debt before rates rise, Cross said.
“For a small but important part of the population, this is going to be difficult to manage,” he said.
Consumer prices hit a three-decade high of 5.7% in February, well above the central bank’s 1-3% target range.
A wide range of factors have contributed to pushing up inflation – from intense consumer demand following the lifting of public health restrictions, to companies seizing the opportunity to boost their profit margins – but the bank has so far recently hesitated to raise interest rates in response.
The bank’s latest monetary policy actions suggest it “lost the patience it showed in January” when it backed away from raising rates despite mounting pressure to do so, the economist wrote. RBC Josh Nye in a Wednesday report.
Despite the increases, Bay Street economists predict the Canadian economy still has room to grow in the coming year as some consumers and businesses grapple with higher borrowing costs. Strong employment levels and household savings data appear to have bolstered confidence within the central bank in the economy’s ability to withstand rate hikes.
“Growth and inflation data surprised on the upside and the bank sees the economic momentum continuing,” CIBC economist Avery Shenfeld wrote on Wednesday.
“Put simply, the recent data leaves little doubt that the economy can live with a jump to a 1% overnight rate and, indeed, higher rates beyond that.”
Still, Shenfeld said, Wednesday’s decision leaves little doubt the bank is getting tough on inflation.
“They brought out the big guns,” he wrote.
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