Recently the Bank of Canada (BOC) announced its largest interest rate hike in over 20 years. The Central Bank made the move to aggressively increase its Policy Rate as the country continues to recover from the economic instability caused by the COVID-19 pandemic. 

In the past several months, we have seen record-high inflation levels as a result of the low-interest rates seen over the past two years. 

Here’s a closer look at what these new interest rate hikes mean for Canadian homebuyers.

What is the Policy Interest Rate?

The Bank of Canada is our central bank, similar to the Federal Reserve in the United States. 

It is tasked with analyzing economic factors and setting the Policy Interest Rate, which, in turn, informs the lending rate for Canadian banks. 

The Bank of Canada interest rate hike directly impacts the prime lending rate that banks charge consumers. This is reflected when you borrow money from any financial institution. Specifically, when it comes to mortgages and lines of credit. 

Thinking about buying a home in Hamilton? Check out the latest Hamilton homes for sale here. 

How Much Did The Bank of Canada Increase the Interest Rate?

When the pandemic hit Canada, the BOC went into crisis mode, slashing interest rates to almost nothing in order to protect Canada’s economy and give Canadians easier access to borrowing in a time of uncertainty. 

The bank slashed interest rates in 2020 all the way down to 0.25%. 

As the situation evolved, the bank was keeping an eye on the country’s economic recovery, trying to discern the best time to raise interest rates back to a “normal” level. 

The low rates were always a temporary solution.

In March 2022, as the country continued to recover from the pandemic, the BOC announced a 0.25% interest rate hike, bringing the total Policy Rate up to 0.50%. However, as inflation continued to rise, the bank needed to act more drastically. 

In April of 2022, the Bank of Canada interest rate hike went up by 0.50% basis points, the largest single jump since the year 2000. This brought the total Policy Rate to 1.0%. 

It’s important to remember that this is still a record-low rate. In 2019, before the pandemic, the BOC Policy Rate was 1.75%. 

The Canadian real estate market has gone through some changes in the past few years. Here are a few resources to help you navigate through it:

• Sold Over Asking: What it Means and Why Does it Happen?
• Ontario’s New Rules on Blind Bidding
• The 2022 Federal Budget and What it Means for New Homebuyers

How Will Interest Rate Hikes from The Bank of Canada Affect Canadian Homebuyers?

When interest rates were slashed, it became cheaper than ever to borrow money. This, combined with numerous other socioeconomic factors spurred by the pandemic, resulted in an influx of buyers entering the real estate market, ready to buy. 

A lack of housing inventory resulted in an uber-competitive Seller’s Market, marked by rising home prices, multiple offers, and bidding wars. Although it was easier for buyers to secure financing at a low rate, it was harder than ever to actually succeed in buying a home. 

The Bank of Canada interest rate increase in 2022 was also meant to help “cool” the housing market. And our first impression is that it succeeded. 

Here are some of the ways interest rate hikes from the Bank of Canada could help homeowners: 

Home Prices Should Stabilize 

Canada has been hit with record-high home prices since the pandemic. Last month alone, the average price for a home in Hamilton was $949,149. This was up 20.9% over last year. However, one trend we are seeing is that home prices are beginning to stabilize month-over-month. We are not seeing the same huge jumps in home prices, and in some cases, home prices are actually decreasing. 

Multiple Offers are Less Common

Last year, it was normal for a home to receive 15-20 offers, resulting in an aggressive bidding war. Today, we are seeing fewer multiple offer situations. And if a home does go into multiple offers, they are much smaller and less competitive. 

Conditions are Making a Comeback

During the pandemic, it was unheard of to see a conditional offer on a home. Many buyers were waiving their rights to home inspections, trying to place competitive offers that would win them the bid. Today, as prices are stabilizing and multiple offers are becoming less frequent, we are seeing more conditional offers on the table. 

If you’re thinking that all this sounds good for buyers, you’d be right. Many experts are saying we are heading into a much more balanced market that might even eventually favour buyers down the line. 

Learn about the difference between a Buyer’s Market and a Seller’s Market here.

How Will the Bank of Canada Interest Rate Increase Affect Mortgages?

One of the biggest concerns with any Bank of Canada interest rate hike is the increases it will cause to your mortgage. However, this has been slightly sensationalized by the media. Here are a few things you should consider: 

Only Variable Rate Mortgages are Affected by BOC Increases

When choosing a mortgage, you typically have two options: a variable rate or a fixed rate. Variable rate mortgages fluctuate with the lending rate over the term of the mortgage (typically 5 years). A fixed rate mortgage has a static rate that remains constant for the mortgage term. Fixed rate mortgages are determined by bond yields, not the BOC Policy Rate. 

If You Have a Variable Rate Mortgage, Your Monthly Payment Might Even Stay the Same 

Depending on your mortgage contract, an increase in the prime lending rate may result in either an increase in your monthly payment or an increase in the amortization period of your mortgage. For example, some lenders offer a mortgage where the amount you pay stays the same no matter what, but the split between interest and principal is what changes. 

The Current Increase Might Not Hit Your Wallet As Bad as You Think

If your mortgage contract stipulates that your payment increases when rates increase, you might be in a better position than you thought. Mortgage experts are quick to point out that the current Bank of Canada interest rate increase in 2022 will likely not hit as hard as you expect. Most experts say that for every 0.25% increase, you can expect to pay about $11 for every $500,000 of mortgage debt. 

For example, if you have a $500,000 mortgage and interest rates go up 0.50%, you will pay about $110 extra per month. 

Don’t Forget About the Mortgage Stress Test 

When you apply for a mortgage in Canada, you have to pass what is known as the “mortgage stress test.” Essentially, your lender will approve your mortgage at a much higher rate than actual, to ensure that you can afford interest rate increases should they occur. 

Will the Bank of Canada Increase Interest Rates Again?

The short answer is: yes. BOC officials have already said that further aggressive increases are on the way. Currently, the BOC is working to get the interest rate back to a “normal” level.

The next policy meeting is June 1 and many economists are predicting another 0.50% increase announcement. But only time will tell. 

In a shifting real estate market, you need an experienced realtor in Hamilton. Contact us today at 1-844-484-SOLD to learn more about how we can help buyers and sellers. You can also email us directly here.