Bank of Canada Raises Benchmark Interest Rate

Yesterday was Wednesday the 13th – but for some, it might have felt like Friday the 13th. That’s because the Bank of Canada announced they’re upping their rate by a whopping 0.50%. This rate hike means that the prime rate will increase from 2.7% to 3.2%, a fairly sizable jump relative to what we’ve seen in the last couple of years. 

All of this might seem terrifying. But let me assure you: there’s no need to panic. 

How Does This Affect Me?

If you’re looking to secure a fixed-rate mortgage, you can take a deep breath. The rate hike announced yesterday won’t directly affect you. Why? Because fixed rates are based on Canada’s 5-year government bond yields. Those are currently sitting at 2.53% and have not changed with this latest Bank of Canada rate hike. 

In fact, I don’t expect fixed-rate mortgages to move much at all over the next 12-18 months. Those rates already increased over the last five months in anticipation of rising rates, so investors have built in the rate hikes already. 

If you have a variable rate mortgage, you can expect your interest rate to go up by 0.50% on May 1st. Many economists forecast even greater hikes in 2022, so we could see that number jump again by the end of the year. However, what goes up must come down. I predict that these rate increases will be followed by some rate decreases.

Why Is This Happening?

Rates were bound to rise at some point. The pandemic saw rates plummet to historical lows in order to help the economy recover. Now, higher rates are needed to help stabilize inflation. Bank of Canada Governor Tiff Macklem has said himself that inflation needs to come back down to 2% – a far cry from the 3.5% annualized we’re currently sitting at. 

The Bottom Line

We’re currently going through a bit of a transition period. Homes are starting to sit on the market a little bit longer. Bidding wars have gotten less aggressive. The number of listings has shot up by 25%. In my estimation, home prices will level out and potentially even drop slightly in the next few months. 

Fortunately, this won’t last forever. Immigration will surge causing home values to pump back up. Plus, rising rates will likely cool down in the new year. As long as you’re holding onto your property for at least seven years, you should be able to ride out any fluctuations in the market. 

My advice? Don’t make any rash decisions. News comes at you quickly, but that doesn’t mean you need to act quickly. Take the time to think long term. Make sure you’re not making any panic-driven decisions. And always, always consult a professional before you make a move.

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca