Latest rate hike proving costly

June 16, 2023



It may have been the surprisingly robust housing market that pushed the Bank of Canada (BoC) to raise the overnight rate by 25 basis points on June 7 bringing the rate to 4.75 per cent and the prime rate up to 6.95 per cent.
This marks the first hike since the BoC briefly paused raising rates after hiking them in January 2023 for the eighth time in a year.
As examples, housing sales in Greater Vancouver were up 15.7 per cent in May 2023 to 2,947 transactions and have now increased month-over-month for six months straight.
In Calgary, housing sales hit a record high for May and the benchmark home price was up 3 per cent from its former peak a year earlier, to $557,000.
“Calgary’s housing market continues to exceed expectations with the recent gain in sales activity this month,” said Calgary Real Estate Board chief economist Ann-Marie Lurie, adding that Calgary is seeing healthy job growth.
Housing sales were reported higher across Canada in May and provincial unemployment rates are flirting with record lows in the sub-5 per cent range.
The BoC rate is now at the highest level in more than two decades.
“Based on the accumulation of evidence, governing council decided to increase the policy interest rate, reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the two per cent target,” BoC said in a news release.
Residential investors and first-time buyers—who often opt for the lowest short-term rates—will be the first affected, mortgage brokers say.
“Variable-rate holders will feel the sting of this rate hike first,” said Victor Tran, a mortgage and real estate expert with Rates.com. “Especially investors with months of continuous negative cash-flow. We will likely see some forced sales due to pressures from rising housing expenses. It will take up to a month for these households to feel the full effects of the hike. Inventory has been tight, and this is likely to increase it over the coming months.” 
Concern is also growing over renewals. A recent analysis from Desjardins Capital Markets showed first-time homeowners that took out five-year fixed rate mortgages during the pandemic will renew in 2025 and 2026 at an increased price of approximately 15 per cent. Five-year variable rate holders that took out mortgages in the same time period can anticipate an increase of up to 40 per cent. 

For example, a five-year fixed rate insured mortgage holder with a rate of 2.99 per cent (based on the average insured fixed mortgage rate of Q1 2018), would have monthly payments of $2,363.67 (based on $500,000 mortgage, 25-year amortization). Renewing this year at a rate of 4.99 per cent, mortgage payments would increase to $2,805.53, a difference of $441.86 (based on $427,290.42 mortgage, 20-year amortization). To renew with a different lender, the mortgage holder would have to qualify at a rate of almost 7 per cent, according to Rates.com calculations on 25-year and 20-year amortizations, respectively.