Rising interest rates hit Canadian mortgage borrowers hard

The Bank of Canada's (BoC) recent decision to increase its base rate to 4.75% has some immediate impacts on many Canadians with mortgages, who are now facing the increased likelihood that their liabilities will be adjusted. This move by the BoC prompted Canada's commercial banks to quickly follow suit, raising the minimum lending rate to 6.95%.

This increase in rates means that Canadian borrowers with variable interest rates and flexible payments, particularly those with volatile mortgages, will be the first to feel the rate hikes. According to Ratehub.ca, a website that compares financial products, the average homeowner who has a mortgage loan of $664,000 CAD over 25 years, with an adjusted rate of 5.55%, and is making monthly interest payments of approximately CAD 4,100 will see their interest rate increase by 5.8%, adding over $100 per month to their mortgage payments.

While the amount of additional interest payments may seem small, the cumulative impact of rate hikes since March 2022 is weighing heavily on borrowers mortgaged by the BoC as they have adjusted interest rates by 4.5 percentage points since last year. Financial experts have warned that this latest interest rate hike could increase consumer overdue debt and affect the recovery of housing prices, which may also have a knock-on effect on the rental housing market, forcing homeowners to sell investment properties due to high mortgage costs.

As the inflation target of the BoC is at 2%, this rate hike was expected due to the strong economic indicators. Economic growth in the first quarter of 2023 stood at 3.1%, surpassing all expectations, the unemployment rate remained low below 5%, and the housing market activity began to recover, which disrupted all policy calculations. Inflation in Canada has been on a downward trend but is still at 4.4%, which many forecast to only drop to 3% in the final months of this year and might get stuck there.

While rate hikes are a necessary measure to control inflation, they can impact consumers in various ways. The BoC's decision to increase its base rate will affect many Canadians with mortgages and may pose some challenges for the housing market and real estate investors. As we continue to assess the potential impacts of this latest rate hike, borrowers should work closely with their lenders to understand and minimize the impact on their finances.