18 May
Borrowers who have a variable-rate mortgage are about to receive a further rise in their payments as the Bank of Canada has announced an additional 50-basis-point prime rate hike last Wednesday. This was followed by the decision of the Bank to increase their overnight target rate from 0.50% to 1.00%, citing the excess demand in the economy and inflation âpersisting well above targetâ.
The prime rate on which the variable mortgage rates are priced will increase to 3.20% at RBC, BMO, CIBC, and Scotiabank effective last Thursday. This will be followed by other mortgage lenders. However, TD Bank is the only bank that has their prime rate priced 15 bps higher than the remainder, at 3.35%, which was an independent rate hike made by the bank in 2016.
How much more will variable-rate holder pay?
The general rule is that for each .50% of rate increase, the monthly mortgage payment will increase by $25 per $100,000 of debt, based on the amortisation period of 25 years. Considering the current rate hike, variable-rate mortgage holders, who have purchased a house in the past two years have paid $647,036, according to the recent data from Mortgage Professionals Canada. The average down payment was $297,476, working out to a loan amount of $349,560, in line with recent figures from Equifax Canada.
Homebuyers who purchased a house in January, they could have secured an uninsured variable rate of about 1.40%. Amortized over 25 years, this would work out to a monthly payment of $1,381. However, considering the current rate increase, that same variable rate will rise to 2.15%, increasing that payment to $1,506, or an increase of $125.
It imperative for borrowers to note that there will be another rate hike in June, as suggested strongly by several analysts and economists. The next meeting which will be conducted on the 1st of June 2022, the BoC will propose another rate hike, and the size of this rate hike will be dependent on the rate of employment and the level of inflation in the country. Hence, in order to control this inflation, the bank will have to increase their rate in order to achieve their inflation target of 2% by the end of this year or in early 2023.
If rates were to increase to 2% by the end of this year, this would imply a prime rate of 4.20%. In such situation, a borrower would then have to pay $1,681, about $300 higher than it started in January, or $3,600 more each year.
