The Bank of Canada raised its key interest rate by three-quarters of a percentage point on Wednesday, the latest move by the central bank in its mission to rein in runaway inflation.
After cutting its rate to near zero in 2020 to help stimulate the economy in the early days of the pandemic, Canada’s central bank moved aggressively to raise lending rates in an attempt to calm searing inflation. , which reached its highest level in decades. .
The bank rate affects the rates Canadian consumers and businesses get from their banks on things like mortgages, lines of credit and savings accounts.
At the beginning of the year, the bank’s rate was 0.25%. After Wednesday’s move, it is now at 3.25%. This is the highest level of the bank rate since the beginning of 2008, before the financial crisis.
Although Canada’s inflation rate fell somewhat last month from its 30-year high of 8.1%, the bank noted in its decision that most of the decline was due to oil prices. gasoline, while the rest of the economy still experienced “further rising price pressures, particularly in services.
This lingering underlying inflationary pressure is a key reason why “the policy interest rate will need to rise further,” the bank said, noting that it “remains steadfast in its commitment to price stability. and will continue to take the necessary steps to achieve the two percent inflation targets.
The move was widely expected by economists watching the bank. While the bank has now hiked rates five times this year, economists believe more rate hikes are to come before the end of this year.
Series of “aggressive” hikes
Jimmy Jean, vice president and chief economist at financial services conglomerate Desjardins Group, says the bank is making it clear that it is committed to raising lending rates for as long as it takes to bring inflation down to below by 3%.
Five big rate hikes in just six months, “by any historical standard, it’s a very aggressive tightening cycle, but what the bank is saying today is that it’s not over,” he said. said Jean in an interview with CBC News on Wednesday.
Jean says it typically takes up to two years for the full impact of higher rates to be felt in the economy, which means he thinks high rates will persist until at least 2023, even if they result in the economy tipping into recession. .
“We already have the highest interest rates we’ve had since 2007 and it’s going to be very hard to think that this won’t have a big impact on consumer budgets and even maybe things like insolvencies,” he said.
WATCH | Expect more rate hikes to come, according to the economist:
The move means anyone with a variable rate loan will likely see their payment change in the coming days to follow the central bank’s decision. Two of Canada’s biggest banks, RBC and TD, raised their prime rates by the same amount as the central bank, effective Thursday. The others should quickly follow suit.
Many mortgage holders have already felt these increases several times this year, as rates on variable rate loans have risen from less than 2% at the start of the year to more than 4% and, in some cases, 5 % today.
Imminent “trigger rate” for many loans
A large group of Canadian borrowers who have thus far been relatively insulated from rate hikes will feel this one, however, because of the way these loans are structured.
Most adjustable rate mortgages offer borrowers the option of keeping their payment fixed, even if the rate changes. As interest rates rise, the amount of each payment that goes to repay the principal is reduced, while more and more is spent on interest. This extends the term of the loan, even if the regular payment amount does not increase.
Eventually, this discrepancy becomes so large that the loan payment is interest only, in which case the payment terms must be adjusted. It’s called a trigger rate and “every mortgage broker in Canada and every bank…gets a constant barrage of calls” about it right now, mortgage broker Ron Butler says.
Exactly when a mortgage will be triggered will depend on the loan, but with rates rising so far and so rapidly, many have already gone over the limit or are about to do so.
Butler says just six months ago it wasn’t hard to get a loan at around 1.5%. But with five major rate hikes since March, that same loan now costs 4% or probably more.
At this point, the initial loan payment isn’t even enough to cover the interest portion – let alone pay off the balance a bit.
“Customers who have an adjustable rate mortgage with a static payment worry that they’ll eventually hit a trigger point in their contract and see their payments go up,” Butler said.
“I really have to get attached”
Debbie Henry is one of them. Henry, who lives in the Toronto area, took out a variable rate loan in November last year with a fixed payment of $805 every two weeks. Although her payment hasn’t changed yet, she is aware that her loan has a trigger point and she fears she will breach it soon.
As it stands, she says she thinks her mortgage payment is all for the interest portion and she’s not paying any principal.
“If it’s at this trigger pace, I have to really get attached,” she told CBC News in an interview. “I don’t want to worry about the mortgage because one way or another it will be paid.”
Anshu Khanna has a fixed payment on a variable rate loan for a property she owns in downtown Toronto, and she says her trigger rate has not yet been activated.
“If it continues to a point where they have to increase the actual monthly payment, it’s definitely going to start to pinch,” she told CBC News in an interview. “We’ll see what happens.”
It’s hard to say exactly how many people are in the same boat, but Bank of Canada data suggests that about a third of all mortgages in Canada are variable rate loans, but within that, two-thirds of them have a fixed payment.
Canada’s largest lender, the Royal Bank of Canada, estimated last week that it had around 80,000 home loans on its books that would soon reach their trigger point. “Our records indicate that you may be approaching your trigger interest rate – a time when your regular payment is no longer sufficient to cover the interest portion of your mortgage,” the bank told some of its mortgage holders in a recent letter obtained by CBC News.
“If this event occurs, your mortgage payment will automatically increase,” the letter states.
Among those affected, the average payment is expected to increase by around $200 a month, said the bank’s chief risk officer Graeme Hepworth. said in a call with financial analysts last month discuss the bank’s quarterly results.