What the Newest Interest Rate Hike Means for You

In what we'll call an unsurprising yet unwelcome twist, the Bank of Canada hiked interest rates again this week. 

Yes, we all knew it was coming but that doesn’t make the announcement any easier to stomach. Especially given the fact that rates were hiked another 75 basis points bringing the prime rate to 5.45%. *Cue collective, "Yikes".

Like many people, you're probably wondering how this news affects you. So, whether you're a current owner or hopeful future owner, here’s what you need to know:

What This Means For Current Owners
If you’re a current home owner with a fixed rate mortgage, there’s no need to worry right now; this hike will not affect you.

If you have a variable rate mortgage you’ll likely be facing one of two situations right now;
Those with an adjustable rate mortgage or ARM, will face an increase in payments of about $44 per every $100,000 borrowed. If you are among those in this situation, you do have the option of locking in to a fixed rate mortgage without penalty. The only caveat is to avoid a penalty you must stay with your current mortgage provider and the rate they offer.
If you have a standard variable rate mortgage, your monthly mortgage payments typically don’t change however the interest charged increases so less of your payment will be going toward the principal. Most importantly, you may be reaching or have reached what’s called the Trigger Point. This is reached when the monthly interest becomes equal to or higher than your typical monthly payment. 

If you’ve reached this point your mortgage lender should get in touch with you to offer some options, which might include increasing your monthly payments, allowing you to make a lump sum payment to reduce your overall mortgage, or locking in to a fixed rate mortgage. If you choose the latter, the same rules mentioned above would apply.

What This Means For Future Home Buyers
For hopeful homebuyers, you might be surprised to learn it’s not all bad news for you. In fact, this hike could work to your advantage. It may be hard to believe but many buyers - especially first timers - are in a better position now than they were a few months ago.

First of all, the rate hikes have resulted in significantly less competition as more cautious buyers and investors have taken a back seat. There is also quite a bit more inventory - in Hamilton at this time last year there were around 24 homes available under $500,000. This year, there are close to 40.

Additionally, current asking prices are truly asking prices. This is in contrast to even a few months ago when homes were vastly underpriced and the final sale price would end up being hundreds of thousands of dollars over asking. 

Because of this, your monthly mortgage payment may actually be less than it would have been had you bought in February.  

As you can see in the chart to the left, even if your mortgage rate is now 5.25% that actually means your monthly payments would be less than before - as would your land transfer tax.

Now, this chart does assume you’ve given a 20% down payment so if that’s not the case you would have to pay mortgage insurance, but regardless, it remains true that your monthly payment would be lower now than in it would have been in February had you bought when home prices were bloated.

While the news has proven to be stressful for many of you, we do hope this information helps and as always if you have any questions or would like us to provide the name of a trusted mortgage professional, feel free to reach out!