Bank of Canada Cranks Up the Heat – Another Hike Announced

The Bank of Canada raised its overnight rate target by 25 basis points to 5% in July 2023, continuing its tightening cycle after a brief pause. This decision was driven by strong consumption and tight labour markets, leading to persistent inflationary pressures.

The move comes as the central bank tries to balance economic growth with pressure from inflation and maintain its policy mandate of keeping inflation at or close to two percent.

Economists had been predicting a 25-basis-point increase, and the central bank’s decision brings the benchmark rate to five percent, the highest level in approximately 30 years.

This marks the third interest rate hike in 2023, with the bank having raised its key interest rate eight times in less than a year. The central bank aims to restore price stability and is closely monitoring inflation dynamics. The rate hike seeks to balance economic growth and inflationary pressures for stability in the Canadian economy.

What does this mean for homebuyers?

The rise in interest rates makes borrowing money more expensive and poses challenges for homeowners in Real Estate Canada, especially those who are financially vulnerable.

For homeowners with a variable-rate mortgage, the increase will result in an immediate and significant rise in their mortgage payments. On the other hand, those with fixed-rate mortgages will experience the impact when their term expires.

However, since not all mortgage terms end simultaneously, the transmission of this monetary policy change to households may have a slightly longer lag.

The rate hike means that more of homeowners’ disposable income will have to go toward paying interest on their debts, leaving less for other essential expenses.

Economists warn that this will be particularly challenging for individuals with high levels of personal debt, such as student loans, and those in the housing market. Some homeowners may find it difficult to finance their mortgages due to the rapid increase in interest rates without corresponding income growth.

Financial experts recommend various strategies to navigate this situation, including advising potential homebuyers to seek pre-approval to secure today’s fixed rates for up to 120 days. This precaution allows the first-time home buyer to plan for a 25-basis-point interest rate hike and benefit if the rates hold. Current homeowners with mortgages up for renewal within the next year are advised to explore rates with new lenders. This way, they can use the lower rates and switch to a new lender before their rate hold expires.

Why were the interest rates hiked?

Excess economic demand has proven more persistent than anticipated, and inflation rates have remained above the target. By raising interest rates, the Bank of Canada seeks to cool down demand from households and businesses to align it with production capacity. This helps alleviate upward pressure on prices and tackles inflation.

Inflation is a concerning factor for the economy, as it can quickly destabilize it. The interest rate increase is not intended to punish homeowners but rather to prevent inflation from spiralling out of control. The bank’s goal is to keep inflation manageable to ensure economic stability.

Our advice to you

Homebuyers, especially those with variable-rate mortgages, will face immediate increases in mortgage payments. Seeking pre-approval and exploring rates with new lenders is advised.

Use tools such as a Canadian mortgage calculator to help plan your cash flow and consult a professional to guide you through this challenging phase.

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