8 times a year, the Bank of Canada has their meeting. With this meeting, usually comes announcements related to interest rates. Each time one of these announcments happen, we like to provide our clients with a rate update, summarized below.
However, with this particular update, I wanted to put some information out in more layman’s terms.
People have been asking me “why”. Why are rates going up so much? General prices are going up (gas, groceries, kids activities, travel etc) so why does the government want us to pay more for our mortgage payments, car payments, and loans?
The answer is: inflation.
What does this actually mean though?
Inflation causes the price of goods and services to increase. This is when demand outpaces supply. Supply chain issues have been huge this year with the war in Ukraine, labour shortages, and general cost of goods increases. By increasing the lending costs (mortgages, cars, loans etc) the Bank of Canada is saying: “Stop spending”. This translates to the BOC wanting people on the whole to spend less on shopping, traveling, goods, services, etc to decrease the overall demand.
One side effect of these increased rates may be a decline in house prices. This is partially caused because it is now much more expensive than it was a year ago to borrow money to purchase a home (mortgage).
Below is our standard notes:
The Bank of Canada had their rate update today (July 13th) and announced another much anticipated rate increase to the overnight rate. It has increased by 1%, the largest increase since 1998. The new overnight rate is now 2.5% bringing mortgage lenders prime rate to 4.7% (the rate that variable rates are based off of).
For the full update from the Bank of Canada:
https://www.bankofcanada.ca/2022/07/fad-press-release-2022-07-13/
Key Points from the update:
- Bank of Canada increased their rate by 1.00%
- The Canadian economy is running at a high rate of inflation with global factors such as the continuing war in Ukraine and global supply chain issue being a main factor
- The main driver of today’s increase is the government’s attempt to fight inflation
- Likely we may be looking at another increase at the BOC next rate meeting
How this affects everyday Canadians
- Interest rates on variable debt (variable rate mortgages and lines of credit) will increase by 1.0%
- For every $100,000.00 of mortgage debt payments will increase by roughly $96.00 a month (based on a 25 year amortization)
Our thoughts:
The Bank of Canada dropped their overnight rate by a total of 1.5% during the onset of Covid. We are now at an overnight rate that is higher than pre-covid levels. It is still lower than it was for much of the period of 2000 – 2010
With the drastic rate increases that have occurred in the last few months we expect to see real estate values fall potentially as costs of borrowing increase. The Bank of Canada seems bent on reducing inflation by doing rate increases. Until inflation levels drop we can expect to see our borrowing costs (interest rates) increase.
As always please feel free to reach out to us at anytime with your mortgage questions.
