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interest rates hike in Canada

Interest Rates Hike in Canada

In an effort to slow down the rate of inflation, the Bank of Canada has increased its benchmark interest rate by the most in more than 20 years.

The benchmark interest rate for Canada was increased by a full percentage point to 2.5%, in July 2022, by the country’s central bank. Since 1998, the bank’s interest rate has increased by that amount the most.

The rate that Canadians receive from their lenders for things like mortgages and credit lines depends on the bank’s rate. In response, two of Canada’s major banks have already changed their benchmark rates; as of Thursday morning, Royal Bank and TD increased their prime lending rates from 3.7 percent to 4.7 percent.

The other significant lenders are anticipated to quickly follow suit.

When a central bank seeks to boost the economy by enticing people to borrow and invest, everything else being equal, it lowers the lending rate. When it tries to calm down an overheated economy, it increases rates.

In an aggressive effort to combat inflation, which has increased to its highest level in 40 years, the bank has hiked its rate four times since March after cutting it to record lows at the beginning of the pandemic.

Bank of Canada trying to catch up with runaway inflation

The bank increased its rate by the full percentage point instead of the three-quarters of a percentage point that economists had predicted it would. And given how serious the threat of persistently rising inflation is, additional hikes are anticipated even after this record-breaking increase.

Governor of the Bank of Canada Tiff Macklem stated that the bank decided to begin its rate-hiking campaign sooner than expected because Canadians “are growing more concerned that high inflation will continue. We cannot permit that to occur.”

Then, in anticipation, fixed rates rose, and they have (largely) already priced in today’s quadruple-hit of 1.0 percent (0.25 percent is considered a single raise). We wait and see if these drastic increases will be sufficient to contain inflation without tipping Canada into a recession..

Things aren’t all bad

The cost of living has been increasing like an errant party balloon. The Bank of Canada (BoC) is pushing through these swift rate rises in an effort to control inflation before it escapes control and causes greater harm over a longer period of time.

Housing markets all around the country are gradually returning to a more balanced position ever since the rate hikes started. Particularly in the larger city centers, where housing affordability has been a significant barrier for first-time home buyers, sales are slowing and values are deflating from their recent historic highs.

Rates couldn’t continue to be so low indefinitely. Additionally, the increase in property prices was too swift. As the markets try to recover from pandemic shock and global volatility over the next year or two, we as a country must prepare to deal with higher rates.

What happens if these swift rate increases plunge our economy into a recession? Then, like with every previous cycle of rate increases, rates will need to decline once more.

Last but not least, there are various ways we may assist you to free up money or save money. Our highly skilled brokers can offer the best suggestions for maximizing the use of your mortgage.

What does today’s increase mean for your variable-rate mortgage?

This enormous increase means you will have to accept a further rise in your mortgage payment to cover the higher interest rates. For instance, on a $475,000 mortgage, you will now pay around $240 more per month than you did before the increase (June 1).

If you were eligible for our lowest rate when it was 0.99 percent, your rate would be 3.24 percent now, indicating you would have to pay an additional $519 per month as a result of the rate hikes.

Consider adjusting your payment schedule to avoid higher charges.

Time to switch to a fixed rate?

Homeowners in Canada who previously opted for a lower variable rate over a fixed one due to the large spread might be concerned about whether it’s time to switch. Your knowledgeable Freedom Capital -Financial Advisor, can do the figures in just a few minutes. You’ll get your optimal savings scenarios for your piece of mind as rates rise.

Hit Pause on Rising Rates

If you’re planning to buy soon, we can hold your best rate for up to 120 days, whether it’s variable or fixed rate mortgage. In the case of a variable rate, a hold guarantees that you will keep the lender discount (off of prime) while you deliberate your next (mortgage) step.

Since variable rate mortgages are strongly correlated with the central bank’s rate, the housing sector will be most directly impacted by higher rates.

For the majority of the pandemic, Canada’s housing market was booming thanks to historically low interest rates that fueled demand and drove prices to all-time highs. However, that trend reversed in the first quarter of this year as the central bank’s warning of impending rate increases dampened market momentum.

According to the Canadian Real Estate Association, average prices have decreased across the nation since March. The rate increase on Wednesday won’t change that trend in any way.

The stress test threshold for prospective house purchasers’ finances must be raised by the rate hike on Wednesday to around 7% for fixed rate loans and 6% for variable rate loans in order to ensure that they can tolerate higher borrowing rates.

Lenders are required to reduce the amount they will lend to borrowers until they pass the stress test if they fail it.

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