Should You Be Worried About Rising Mortgage Rates? Read What Canada’s #1 RE/MAX Agent Thinks About Inflation & Cooling the Country’s Hottest-Ever Housing Market

Posted by Justin Havre on Friday, April 29th, 2022 at 2:08pm.

Justin Havre on Rising Mortgage Rates in Calgary In April 2022, The Bank of Canada boosted its policy interest rate by 50 basis points to compensate for economic inflation experienced across the world. Many global factors drive inflation, and all of us can see the effects right here in Calgary.

The recent rate hike was Canada's most drastic increase in decades, and despite forecasts from expert economists, no one knows for sure how much higher the Bank of Canada will increase rates.

Amidst this uncertainty, Calgary homeowners wonder what this means for their mortgages. To shed some light on the situation, Justin Havre weighed in on rate hikes, estimated monthly payment increases, and whether or not the changes will cool Canada's highest-ever real estate demand.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

What Are Mortgage Rates And Why Are They Rising?

Mortgage rates are the percentage of interest charged by a lender on your mortgage loan. Think of them as the price you pay to borrow money.

Here's Justin's summary of the most recent economic events:

"Canadians are experiencing inflation in all areas of the economy, the bank of Canada did its second rate hike of 2022 and the biggest rate hike in decades, with major banks reacting immediately by raising their prime rate to 3.2%. The Bank of Canada is expected to continue to raise their rates to fight inflation."

The Bank of Canada's overnight rate increase influences fixed and variable mortgage rates. Although the specifics vary for each type of loan, the rationale is effectively the same. The price to borrow money has increased to compensate for inflated prices of goods and services.

Can Increased Rates Reduce Home Prices?

Short answer: Maybe, but not right away.

Canada's in the middle of its hottest ever real estate market. Nationwide, demand for real estate topples supply, driving home prices to never-before-seen prices. By making it more expensive to borrow money for a home loan, some people wonder if demand will decrease and bring prices down with it.

Justin's answer:

"Higher interest is an attempt by the BOC to put the brakes on the hot Canadian real estate market. Some markets have seen price increases of over 40% in a single year which is the furthest from normal and makes homeownership out of reach for many Canadians. The recent rate hike will have some effect on supply and demand. If the BOC implements gradual and responsible rate hikes, it will be a gradual cooling."

How Will Rising Mortgage Rates Affect My Monthly Payments?

According to Justin, "Canadians with variable mortgages, home equity lines of credit, and new buyers will immediately feel the impact of the higher rates as the cost of borrowing is now more expensive."

Variable mortgage owners experience the effects first because their monthly payments are more directly linked to the ups and downs of the national policy interest rates.

Fixed interest rates also move with the national policy rate, but the relationship is less direct.

Most lenders buy government bonds to cover the risk of their loans, including fixed-rate mortgages. The current economic climate increased the price of bonds, so banks need to increase fixed mortgage rates to ensure they have the same protection.

Here's what Justin says fixed-rate homeowners can anticipate:

"Canadians with fixed interest rates will not feel the impact until mortgage renewals.

For an average priced Canadian home of $860,000 (with 15% down amortized over 25 years), monthly mortgage payments based on a typical best five-year variable rate today of 2% would be about $3,197.

The same mortgage with a 50 basis point rate rise means the estimated payment rises to $3,383, an increase of $186 per month or $2,232 per year."

What's Next? Actionable Steps For Canadian Homeowners

Fluctuations in economic health indicators are entirely natural. While the uncertainty is concerning, it's not a cause for panic. No one can say for sure how many times policy interest rates will increase, nor can they predict how low home prices will drop as a result.

One certainty is that life goes on, no matter what happens with interest rates. Homeowners across the country can soothe their concerns about rising rates by exploring their mortgage options, estimating monthly price increases, and adjusting their budgets accordingly.

Justin believes homeowners can take action now and be prepared for whatever may come:

"The reality is, higher rates mean higher cost of borrowing from the bank. Homeowners who have variable mortgages may seek to lock in their rates to create more stability for their financial planning, but fixed-rate owners may want to budget to spend more, too."