{"id":15888,"date":"2018-10-24T10:57:33","date_gmt":"2018-10-24T14:57:33","guid":{"rendered":"http:\/\/www.zoocasa.com\/blog\/?p=15888"},"modified":"2018-10-24T11:25:58","modified_gmt":"2018-10-24T15:25:58","slug":"bank-of-canada-hikes-interest-rate-to-1-75-in-october-announcement","status":"publish","type":"post","link":"https:\/\/www.zoocasa.com\/blog\/bank-of-canada-hikes-interest-rate-to-1-75-in-october-announcement\/","title":{"rendered":"Bank of Canada Hikes Interest Rate to 1.75% in October Announcement"},"content":{"rendered":"

Get ready, mortgage borrowers \u2013 interest rates are on the rise again. The Bank of Canada (BoC) has hiked its Overnight Lending Rate \u2013 the benchmark used by Canada\u2019s big banks to set their own pricing \u2013 by a quarter of a per cent, to 1.75%.<\/p>\n

It\u2019s the third increase this year, spurred by stabilizing consumer debt, improved economic performance and \u2013 most notably \u2013 the newly-minted US-Mexico-Canada Agreement (USMCA). That the previously beleaguered trade agreement has now been solved removes the main hurdle for the BoC, which held off hiking rates in recent months as trade doubts lingered.<\/p>\n

\u201cThe new [USMCA] will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment,\u201d the BoC states in its announcement<\/a>.<\/p>\n

The central bank also expects Canada\u2019s economy to continue to grow in line with its potential, with GDP to rise by 2.1% this year before slowing to 1.9% by 2020.\u00a0 New oil and gas projects, and steady household spending have also supported inflation which remains 0.2% above its target.<\/p>\n

Tighter Times Ahead for Borrowers<\/h2>\n

The BoC acknowledges that higher interest rates are taking a bite out of consumer budgets, though maintains new borrowing policies, such as the mortgage stress test introduced this January, are being effective in stabilizing household credit levels. It strongly alludes that more hikes are to come, though it will take into account how tougher borrowing conditions will continue to impact both home buyers and the economy.<\/p>\n

\u201cGiven all of these factors, Governing Council agrees that the policy interest rate will need to rise to a neutral state to achieve the inflation target,\u201d the BoC states. \u201cIn determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook.”<\/p>\n

How Will This Affect\u00a0Your Mortgage?<\/h2>\n

Rising rates will spell tighter affordability for borrowers of all kinds, as it will become more expensive to qualify for, and carry, a mortgage. Today\u2019s hike, compounded with the anticipated increases to come, will especially be felt by first-time home buyers, who are entering a rate environment that \u2013 while still historically low \u2013 is higher than they\u2019ve ever experienced before<\/p>\n

Variable mortgage holders will be most immediately impacted, as their lenders will pass this increase down into their monthly payments. However, a higher BoC rate translates into higher Prime rates at Canada\u2019s largest financial institutions. Assuming these lenders pass the entire 0.25% increase into their Prime to 3.95%, a borrower taking out a new five-year variable-rate mortgage today on a home valued at $487,000 (the average Canadian home price as reported by CREA)<\/a>\u00a0can expect to pay $65 more per month than at the previous Prime rate of 3.70%. That\u2019s $780 more per year, and a whopping $19,500 over 25 years.<\/p>\n

As well, higher rates at Canada\u2019s Big Five will in turn influence the Bank of Canada\u2019s benchmark five-year rate<\/a>, which is used as the threshold to stress test mortgage borrowers, meaning applicants will qualify for an even smaller mortgage amount than they did before.<\/p>\n

For example, a home buyer earning $100,000, making a 20% down payment and taking out a 30-year amortization, would qualify for a maximum home purchase of $523,772 under the current stress test rate of 5.34%. Assuming the benchmark rate increases by 0.20% to 5.54%, that same home buyer would then qualify for only $515,011 – $8,761 less towards their home budget. Should rates rise to 6% by 2020, as some pundits have predicted, that qualification amount is slashed by $50,000 \u2013 not small peanuts when it comes to funding a home purchase.<\/p>\n

How Can Home Buyers Prepare?<\/h2>\n

Prospective buyers \u2013 especially those borrowing at their maximum \u2013 who are currently on the fence about their home purchase are wise to lock into a pre-approval ASAP, as policymakers usher Canada into a higher-interest rate reality.<\/p>\n

For existing mortgage holders, it\u2019s time to hit the budget book and ensure that, should interest rates be materially higher upon renewal, they can still afford their monthly payments. Those who have the flexibility to accelerate their payments, or pay a lump sum now, may find that to be of benefit as these methods reduce their overall amortization and boost mortgage principal.<\/p>\n

It\u2019s always a great idea to connect with a mortgage broker or adviser prior to starting your home search \u2013 they will help establish the ceiling for your home budget and affordability expectations; important peace of mind, especially during a rising rate environment.<\/p>\n","protected":false},"excerpt":{"rendered":"

Get ready, mortgage borrowers \u2013 interest rates are on the rise again. The Bank of Canada (BoC) has hiked its Overnight Lending Rate \u2013 the benchmark used by Canada\u2019s big banks to set their own pricing \u2013 by a quarter of a per cent, to 1.75%. It\u2019s the third increase this year, spurred by stabilizing […]<\/p>\n","protected":false},"author":39,"featured_media":15889,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jnews-multi-image_gallery":[],"jnews_single_post":[],"jnews_primary_category":[],"footnotes":""},"categories":[196,33],"tags":[],"class_list":["post-15888","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bank-of-canada","category-real-estate-news"],"yoast_head":"\nBank of Canada Hikes Interest Rate to 1.75% | Zoocasa<\/title>\n<meta name=\"description\" content=\"Get ready for pricier mortgages, as the Bank of Canada hikes interest rate to 1.75% in its October announcement. 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