What does this new interest rate hike mean to you?

What does this new interest rate hike mean to you?

Consider the owner of a home worth $458,792, the median home price in Canada, who has a 10% down payment. With a variable rate of 5.30% amortized over 25 years, the monthly mortgage payment is currently $2,549.

But with the new 0.25% increase in the principal rate, his mortgage rate will rise to 5.55% and his monthly payment to $2,611. This means that he will have to pay an additional $62 per month or $744 per year on his mortgage payments.

With the eight increments declared, that means the increment is $949 per month or $11,388 per year. A real hole in the budget of many families who have a variable rate on their mortgage.

Put your project on ice

I have clients who have stopped their project. They tell me: we will wait for prices to fall. They can no longer buy the property they want. Prices are going down, but not down 30%, which is not enough to restore full accessibility for everyone »

Quote from Philippe Simard, Mortgage Manager at Welcome

Others simply find it difficult to qualify. Many would like to move towards a variable rate, hoping for a decrease in it in the coming months, but their financial situation does not allow this.

Funnily enough, it’s easier to qualify for a flat rate because variable rates are higher at the momentMr. Simard explains.

according to Welcome.ca, the 5-year fixed rate yesterday was 4.49%, while the variable rate was closer to 5.30%.

There are customers who would like to go for a variable rate primarily, but due to qualification they will have to switch to a fixed rate. There are those who prefer a current fixed price for a security. However, this is not something we would recommend, as we expect prices to drop in the next 18 to 24 months.Mr. Simard explains.

For the economist Hendrix Vachon of Desjardins, the families affected by the surge will have to get their calculators out and go over their calculations in order to weigh all the options.

It can be rationally understood that some people prefer to wait before entering the market. If the Bank of Canada succeeds in its mission, if it is true that inflation is falling and we are entering a recession, eventually we will cut interest rates.he explains.

However, an external event like the war in Ukraine or a major drought could again have an impact on inflation.

There is still a risk that it will rise. People need to be aware of that and that’s where the fixed rate gets interesting, not just for five yearshe explains.

However, the real estate sector does not expect a big antiquity in 2023, as interest rates continue to rise, real estate prices fall, but still moderately.

It is not expected to be a great year for purchasesMr. Simard explains.

Remember that not only does raising the interest rate have an impact on mortgage rates. Any new loan costs 0.25% more than today.

Lenders always pass on all increases announced by the Bank of Canada to consumers, whether for a car loan, line of credit, or personal loans.

With multiple interest rate increases, family budgets have changed quite a bit in recent months. Details by Olivier Burke.

Delaying large purchases

This tightening by the Bank of Canada is aimed at curbing household demand and persuading them to moderate their consumption over the next year in order to bring down inflation as close as possible to the 2% target.

The foundation expects the consumer price index to return to around 3% by the middle of the year and 2% in 2024.

We want people to be more careful. […] And not only that, we increase rates and people automatically consume less. It also has a psychological effect. There are many variables that we are trying to influenceMr. Vachon explains.

With each rate hike, the Bank of Canada adds a degree of caution among consumers who are more inclined to delay large purchases, renovation projects, or a car change.

It takes some time to see the effects of a rate hike. There is a series. People reduce their consumption, companies invest less, and the economy slows down. He is also a dealer who is selling less, reducing his investment, and possibly laying off workersconcludes the economist.

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