If the Bank of Canada hikes its benchmark rate from 0.25%, as some economists predict it will to stave off inflation amid signs of propitious economic activity, how would Canadians fare?
“For your mortgage payment to double monthly on a 25-year amortization, your interest rate would actually have to quadruple, so if you’re at 2% your interest rate would have to go to 8%, and then yes, your mortgage payment doubles,” Paul Shelestowsky, a senior wealth advisor with Meridian Credit Union, told CREW. “Our rate right now, for the most part, is 2.39% and on a $500,000 mortgage that’s a payment of $2,213 a month. If the interest rate doubled to 4.78%, your monthly mortgage would go up to $2,846, which is still a $633 a month increase, and I don’t know a lot of people who can come up with an extra $633.”
Benjamin Tal, deputy chief economist at CIBC, was recently quoted saying that the Canadian economy is vulnerable to rate hikes, which would decelerate the frenetic pace of home sales in the country, although there are early signs of buyer fatigue.
“Even a small increase in interest rates would be sufficient to slow down the market—and that would be a very good thing,” he said.
“To the extent that inflation starts rising and the Bank of Canada is behind the curve and not dealing with it quickly enough, the speed at which interest rates would have to rise might go up,” continued Tal. “And that’s something that can have a significant negative impact on housing.”
Inflation appears to be the wild card right now—is it transitory or will there be a long-term trend of rate increases?—but even if the Bank of Canada sets a trend-setting hike, some financial institutions have recently shown a propensity for not following suit.
And although 80% of Canadian homeowners hold fixed-rate mortgages, which would technically protect them from higher monthly mortgage payments, a lot of them have taken out home equity lines of credit (HELOCs).
“We have a ton of (clients who have taken out HELOCs),” said Shelestowsky. “They make up a decent portion of our lending and they would be affected by rate increases as well. Not terribly, because most HELOCs are interest-only, so a 0.5% interest rate change won’t make or break a HELOC, but it will have an effect for sure.”
One solution for mortgage borrowers who have locked in their term is to opt for a “blend and extend,” added Shelestowsky.
“Let’s say there are two years left on the term of your mortgage but you’re worried that, when it comes to term, rates will be higher, we’ll renew it now for five years, so instead of coming to term in 2023, it will be 2026. That’s something we’ve done a lot for our members to give them peace of mind that, while mortgage rates aren’t as low as they were a year ago, they’re still low enough to take advantage of.”