You’ve probably seen the headlines: the Bank of Canada has raised their key interest rate. Yet again. And this hike isn’t any less forgiving than the last one. In another unprecedented move (anyone sick of that word yet?) the rate increased by 0.50%, double the normal increase of 0.25%. Yes, it’s a big jump that’s getting a lot of media buzz. But how bad is it really? Is it worth all the alarm? Will rates continue to climb?
A Refresher on Rate Hikes
It’s important to remember why the BoC keeps raising rates in the first place: to get a handle on inflation. Their goal is to bring the annual pace of inflation down to 2%. As of April, we’re at 6.8%. We’ve got a long way to go. It’s safe to say that until we’re on pace to reach that 2% inflation number, we could see a few more rate increases.
Is It Time to Panic?
Hardly – although the media would have you believing otherwise. The doom and gloomers of the world seem to think that rates will keep going up perpetually, which isn’t how the economy works. The inflation rate will drop as home sales and sales prices fall. Spoiler alert: that’s already starting to happen. The interest rate hikes will level off once inflation stabilizes, and inevitably, they’ll start to fall once again.
This isn’t anything new. Rates climb. Rates fall. Everything is cyclical in this way and has been for the last 50 years. But that doesn’t stop the talking heads and clickbait headlines from throwing people into a frenzy. During COVID, media outlets realized that making people feel like they’re in uncharted waters wins them eyeballs. The truth is, these waters are well traveled. We’ve been here before and we’ve gotten out of it.
The Bottom Line
It’s important to remember that this week’s rate hike brings the key interest rate up to 1.50%. Pre-COVID, the key interest rate was 1.75%. This is so crucially overlooked: we are still below pre-pandemic rates. Even once we surpass that pre-pandemic level, we’ll never be in a place where rates hit historic highs. We’ll more than likely always remain in the world we were used to before everything changed.
Which is why I can’t recommend enough going with a variable rate mortgage. Yes, your rates will climb throughout the course of the year. But as long as you account for those hikes, your rate will remain well below fixed rates (which are now well into the 4% range by the way). That is a ton of money saved in the long run. As always, it’s so crucial to look at the big picture and not fall into the trap of a 5-year fixed rate mortgage.
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; firstname.lastname@example.org