Canadian interest rates increased January 25th 2023, and what It means for you

Its official - the Bank of Canada has raised interest rates again. While this doesn't come as a huge surprise to those of us who have been paying attention to the economy, it's still worth discussing what this means for home buyers, sellers, and investors in Canada. For starters, it's important to note that only variable mortgage rates will be affected by this change. Fixed mortgage rates remain unchanged at this time, and in some instances have started to come down as well. The BoC has also indicated that they plan to pause any future increases which is a good indication we may have seen the last increase before they eventually subside. So, if you're shopping for a new home or considering refinancing your current mortgage, now might be a good time to weigh your options, and be a bit more strategic about your decision. With that said, let's take a closer look at what the most recent interest rate increase could mean for our housing market.

* I'd like to preface this article with the fact that I am not a mortgage broker, or financial expert. This is completely based on my own personal research, opinion, and experience working with buyers , sellers, and investors as a licensed real estate agent in the Edmonton area. Always consult a mortgage or financial professional before making any financial decisions.

On January 25, the Bank of Canada raised interest rates once again in the continued fight to lower inflation.

On January 25, the Bank of Canada made yet another move to raise its interest rates. This increase marks the 8th increase since the beginning of 2022 (+0.25 March 2022, +0.50 April 2022, +0.50 June 2022, +1.00 July 2022, +0.75 September 2022, +0.50 October 2022, +0.50 December 2022, and most recently +0.25 in January 2023) These rate increases affect variable mortgage rates, and other revolving loans like credit cards, line of credits, etc. It's important to note that increasing the rate usually results in higher payments for homeowners - particularly variable-rate mortgage holders. For instance, this most recent rate increase would raise a variable mortgage holder's payment by about $14 for every $100,000 borrowed compared to the previous rate. Although fixed-rate mortgages have increased as well since early 2022, these rates increase you hear about in the news do not affect them. Fixed-rate mortgages are tied to bond yields and have started to pull back a bit and at the time of writing this article sit in the mid-4 %s on a 5 year term. So if you're in the process of purchasing a home or already own one with a fixed rate - you will be unaffected by this recent jump.

The reason for this is to keep inflation under control and lower it back to the 2% target

With the Canadian economy experiencing a higher inflation rate, the recent increase in interest rates was essential to keep inflation at bay. Thanks to this adjustment, Canadian inflation is estimated to be lower than its current 6.3% (previously 8.1%), reaching an expected 3% by mid-2023 and the Bank of Canada's desired target of 2% by 2024. Once the targeted 2% inflation rate is met, you will start to see interest rates pull back again so that they don't send the country into recession.

How do these rate increases affect me?

Well, as mentioned above if you are a homeowner with a variable-rate mortgage, your payments have undoubtedly increased in recent months. Most recently with the January 2023 increase, roughly $14 for every $100,000 borrowed. The overall effect of these increases causes borrowing to be more expensive. Businesses and Canadians will borrow less and focus more on paying down debt, the businesses that have to pay more for their borrowing needs are likely to pass that extra expense down to the consumer causing the cost of their service or product to be more expensive and the cost of living to increase for everyone.

It's a necessary and temporary process to bring inflation down

As the Bank of Canada increased the interest rate to prevent inflation from continuing to grow, and to meet the target of 2%, we know that these higher rates and borrowing costs are temporary, but also necessary. The cost of inflation is hard on Canadians and bringing inflation down is a necessary burden we must face. However, once the inflation rate has been met, these additional borrowing costs will come down to prevent the country from entering further into recession. To set expectations, we will likely never see the low-interest rates during the pandemic of 2% (+/-) but should see them settle somewhere in the mid-3% range. At this time we are well on our way with expectations that the Bank of Canada plans to hit a 3% inflation rate by mid-2023, and the 2% target in 2024. So, when planning your current refinance or home purchase, it's important to make sure to have a strategy that makes sense with current economic expectations.

Should I wait to buy a home?

This is a question I hear a lot lately. The truth is, it depends on you, your goals, and your current financial situation. When looking at the information in front of us, we can see that interest rates are higher now, than they will be in the future. This fact alone is causing some buyers to put off their purchase until later. But, one thing to keep in mind is that if many buyers are also considering the same strategy, what do you think will happen to home prices when interest rates do come back down and all of these buyers jump into the market? Higher demand will increase prices. Right now, and directly because of the rising interest rates, we have seen our Edmonton real estate market move from a seller's market to a more balanced market and even a buyer's market in some locations and market segments. So what this means is that just one year ago, buyers were competing for a limited supply with a higher buyer demand, which caused home values to increase because so many people wanted to find a home and take advantage of the lower rates. This, in my opinion, is not a good market for buyers as it's highly advantageous to the sellers. Where in a balanced market, or buyers' market, buyers can be more selective of what they want, home values are more reasonable and negotiable, and there is the opportunity to get in at a lower value today compared to when the market shifts again in the future.

Yes, to take advantage of the current prices and market, you will need to be more strategic with how you structure your mortgage to make sure you will not overpay in interest in the long run which could easily eat up any price reductions you found in the current marketpalce. There are a couple of ways you can do this.

Here is a screenshot of a recent interest rate update I received from a local mortgage broker. Please keep in mind, these are not the lowest rates I've seen or even what you should base your decision on, but they are in the ballpark of what's out there right now as this article is written, and will serve the purpose of discussing a couple different strategies you might consider. I will reference this chart below:

  • Go with the higher variable rate - Woah... calm down... I know what you're thinking... "ARE YOU NUTS!!!" Give me a minute to explain, and hear me out here. So we know that these rates are temporarily increased to combat our inflation problem. There is an end date, and they have to come down eventually to prevent sending the country too deep into a recession. So, the thought here is; does it make sense to take the higher rate now to take advantage of a lower home price compared to when prices inevitably increase again once rates come down and buyer demand grows? It just might make sense depending on the purchase. You can also opt for a fixed variable product where the idea is you take the higher rate, and lock in that payment so that when rates do come down, your payment stays the same, and you are paying more toward the principal, thus paying your mortgage off faster. This is a good strategy if buying well within your means.
  • Take a short-term Fixed Rate - This option allows you to refinance your mortgage in a year or two when mortgage rates are expected to be lower. The risk here is we don't know exactly when that is for sure. The government of Canada tends to be slow to reduce rates, even if the 2% inflation target is met. However, they can't wait too long for fear of sending the country into recession. So, if they expect that target to be met in a year, maybe you opt for the 2 years to be safe? It's still cheaper than paying the higher rate for a full five-year fixed rate term. But, as you can see above, the shorter-term fixed rates are quite a bit higher, so this should be considered as well. Does it still make financial sense? Ask your financial professional.
  • Take the currently reduced 5-year fixed rate - It might look tempting, because it is the lowest available rate right now, especially compared with the other options you see. But maybe this is by design? Let's dig into this... So if I was a bank, and I could see that interest rates were likely to be lower a year or two from now compared to today, it might make sense to offer a reduced option for the longer term. Especially if it is anticipated that rates will be even lower than this reduced option in the future. That way the consumer has locked in at 4.5% for 5 years, instead of taking advantage of the potentially 3-3.5% (an educated guess) in 1-2 years from now. Now, having said all of that, there are no guarantees in this current economic world we live in, so there is always risk involved. The reality is, if you look at interest rates over the last 40 years, 4.5% isn't actually all that bad. It's pretty damn decent compared to what we've seen. Ask your closest boomer, they'll tell you all about the 18% they paid for their first home. So if it fits in your budget, and you don't want any risk, it might just be the right choice for you.
  • Porting your mortgage or blend and extend - This is an option for home buyers who already have a good interest rate on their current home, but find the need to move. This is a scenario where you would sell your current home and purchase a new home when you still have some time remaining on your current mortgage. Not all lenders offer this as an option, so a discussion with your mortgage professional would be your first step here. If the value of the home you want to purchase is higher than the current mortgage you have, this is where the "blend and extend" comes into play. The lender would offer a middle-of-the-road rate based on the rate you currently have, and whatever current rate is being offered. If you happened to refinance or purchase during the lower rate times and are needing to move now, your blended rate will likely land right around where they are anticipated to be in a year or two, so this could be a good option to discuss with your lender as well. Keep in mind, this is not a product that all lenders offer, and it will highly depend on the terms of your current mortgage. There could be fees and penalties involved if you are trying to break the terms of your current mortgage as well, so make sure to get all of the information from your financial professional and make sure it makes financial sense before you decide to proceed.

There are many different mortgage products, and options available for you to make your home purchase work. What works for someone else, might not work for you, and your current needs, and goals. So talk to your mortgage professional, have them show you some different options, and pick the one that suits you best. 

If you decide to wait to make your purchase based on your current situation, and available options, that is totally up to you, and could be the right move,  but there is opportunity in this market currently, and savvy home buyers will take advantage. But, it's important to have all the information before you jump in.

What do you think about the recent interest rate increase? Let us know in the comments below!

The news of the recent interest rate increase in Canada can be a bit of an intimidating event, however, it's important to note that this increase has a purpose, and isn't a permanent problem. It's essential to do your research and thoroughly analyze the pros and cons of each option before you decide which loan structure works best for you, or when to make your purchase. To make an informed decision, keep reading articles on the topic or contact a financial professional who can answer all your questions based on your specific financial situation and plans. If you have an opinion of your own on the recent interest rate increase, let us know in the comments below!

Posted by Corey Sylvester on


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