Canadian Interest Rate Change Analysis for Homeowners by Bōde CEO, Robert Price
Interest rates have been steadily increasing since the beginning of 2022. This week the Bank of Canada increased the rate again, this time by a full 1%. In 2022, interest rates have now increased 2.25% from 0.25% to 2.5%.
What does this mean for Canadian homeowners?
Since the start of the pandemic in the spring of 2020, the Canadian Government, like many governments around the world have had a challenging economic climate to manage given broad subsidization and unpredictable sectoral swings.
There has been a lot of hysteria around this topic from a homeowner perspective, but what is the actual impact to Canadian in simple financial terms?
Interest Rate Trends
It is helpful to consider pre-pandemic Canadian Overnight interest rate levels for today’s context:
The average Federal rate over the past 10 years is ~1%, meaning the increase to 2.5% is now above the historical average. It is likely that the federal government will continue to incrementally raise rates throughout 2022 to offset escalating inflation.
Homeowner Implications
Implications of interest rate changes should be considered by Fixed and Variable mortgage types.
Fixed Mortgage Holders
If you have a fixed mortgage, interest rate changes do not affect you through the duration of your agreement with your lender. It would be prudent however, to stay on top of your mortgage expiration date and have a view of what a new higher interest rate would mean to your budget using the analysis below.
Variable Mortgage Holders
Variable mortgage holders will experience immediate changes to their payments. For example, a 25-year amortization, 5 year variable term $800,000 mortgage with a 1.45% interest rate increasing to 1.70% is the difference in monthly payments from $3,179 to $3,272 or $93 more per month. A further increase of 0.25% to 1.95% equates to an additional $96 more per monthly payment
Home Buyer Implications
If you are in the market looking for your next home, the same monthly payments will reduce the amount you can pay for a property. For example, assuming a 25-year amortization, 5-year variable term, assuming a $3,000 monthly mortgage payment with 1.45% interest rate, you would be eligible to buy a $755,000 home. Holding these terms constant with an interest rate increase from 0.25% and 0.50% would reduce your prospective home affordability to $735,000 and $715,000 respectively.
Of course, there are other factors to consider including credit, the lender risk tolerance and the specific property in question.
Summary
The traditional residential industry and media in Canada is incentivized to attract eye balls and have you nervous to make your own decisions instead of paying them for advisory services. At Bōde, we are on a mission to eliminate the hysteria and provide clear, simple and accurate information to empower intelligent Canadians to make informed decisions on their most critical asset.
