This week the Bank of Canada (BoC) raised their key lending rate by 0.5%, meaning most banks and consumer lenders will raise their prime rates by the same amount. With most lenders, that means prime rates will increase from 5.45% to 5.95%.
The prime rate increase will directly affect all borrowers with variable or adjustable rate mortgages and lines of credit. If you have one of these types of debt, you will receive a notification from your lender shortly advising you on the change to your interest rate and the new payment amounts.
What’s the impact for current variable rate mortgage clients?
An increase of 0.50% to prime will cause the typical adjustable rate mortgage monthly payment to increase by about $25-30 per $100,000 of debt. So if your mortgage balance is $400,000, you should expect your monthly payment amount to increase by about $100-120.
If your variable rate mortgage was set up a year or two ago with fixed payments and they have not hit a trigger point so far, this prime rate increase will likely make that happen. See our previous post for more details on what happens when prime increases past your trigger point.
What’s the impact for new mortgage qualification?
If you’re hoping to purchase a new property or refinance your existing mortgage, this prime rate increase will reduce the maximum amount of mortgage for which you can qualify.
The average household income in Canada is roughly $85,000, and so for the average household this most recent prime rate increase will decrease their maximum purchase price by between $20,000-40,000 (depending on the type of mortgage, amount of down payment, etc).
What do you think is coming for the winter and into 2023?
For the last month or so we’ve known that an increase was coming, and in fact many banks and economists were predicting a larger increase of 0.75%. This more conservative increase by the BoC is likely in response to the softening inflation rate data from August and September, combined with some early signs that our jobs market is beginning to weaken. It is now largely expected that the Canadian economy is heading for a minor recession next year (along with the economies of most of the G20 countries) as both business and consumer spending is slowing down.
In light of the headwinds shaping up for 2023, the BoC is expected to become much more cautious and conservative with their upcoming interest rate decisions. Given that it takes 3-6 months for interest rate increases to begin having a measurable impact on the economy, the BoC will not even know the full impact of their previous interest rate increases until early next year. The last thing the BoC wants to do now is overshoot the mark on their interest rate tightening and steer the Canadian economy further than necessary into a recession next year.
At this point, we think the BoC will likely make one more increase of 0.25% at either the Dec 7, 2022 meeting or the one after on Jan 25, 2023. After that, we expect the BoC will enter a holding pattern as they gather further data and see how the economy reacts through the spring. Hopefully, as our economy slows down we will see inflation decline over 2023 and get back into the 2-3% range, at which point the BoC can begin cutting interest rates back a bit going into 2024 to stimulate the economy again and help bring us back onto the course of slow, predictable growth.
If you have any questions about how this prime rate increase will affect your current mortgage or your ability to qualify for a new mortgage, please book your free, no obligation mortgage consultation today!