My Mortgage Blog

The Bank of Canada confirmed that additional interest rate increases are necessary, but that we’re now nearing the end of the current rate-hike cycle.

Bank of Canada Governor Tiff Macklem made the comment following Wednesday’s rate announcement, where the Bank increased its key benchmark rate by 50 basis points, bringing it to 3.75%.

"We are getting closer to the end of this tightening phase. But we're not there yet,” Macklem said during a press conference. "…we expect interest rates will need to rise further. So…that could be another larger-than-normal step, or we may be able to move to more normal, smaller steps.”

It was the first time in this rate-hike cycle that the Bank signalled rate hikes would ease going forward and become more dependent on economic data.

In its latest Monetary Policy Report, the Bank downgraded its economic forecasts, and now expects growth to "stall” over the next couple of quarters, and average just 0.9% in 2023.

"The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy: housing activity has retreated sharply, and spending by households and businesses is softening,” the Bank noted.

The Bank’s half-point rate hike was less than markets were expecting and brings the overnight target rate to 3.75%—325 basis points higher than it was in February.

The impact on variable-rate borrowers

It didn’t take long for the big banks and other financial institutions to announce equal increases to their prime rates, upon which variable-rate mortgages and lines of credit are priced.

Prime rate at most financial institutions is now 5.95%, a near 15-year high.

For those with an adjustable-rate mortgage, this will translate into roughly $30 more in interest payments per $100,000 of mortgage based on a 30-year amortization.

However, the majority of variable-rate mortgage holders have fixed monthly payments. This means their monthly payment won’t change, but a larger percentage of that payment will now go towards the interest portion, while a smaller percentage will go towards paying down the principal balance.

The rapid pace of rate increases announced over the past eight months means some variable-rate borrowers are reaching their trigger point, meaning their monthly payments are going almost entirely towards interest cost and are no longer paying down their balance.

While most financial institutions are reaching out to borrowers in this situation, there’s also no harm in being proactive and increasing your payments today if you’re in a position to do so.

Given the prospect of a recession on the horizon, most forecasters are already anticipating rate cuts by the Bank of Canada, which could begin by late 2023 or early 2024.

In a recent speech, CIBC Deputy Chief Economist Benjamin Tal said he expects the Bank of Canada will increase its benchmark rate to between 4.00% and 4.25% and "call it a day.” After that, he says the Bank will most likely be forced to begin cutting rates in response to weak economic conditions, bringing its target rate back to between 2.75% and 3.00% by early 2024.  

For those concerned about rising monthly payments, contact me today so we can go over all of the options that are available to you.