Rate Hikes - Is There a Need to Worry?
Aaron Krausert with RE/MAX
As of today, the Bank of Canada raised the key interest rate by 50 basis points to 1.0%. This is the second hike of what many experts expect to be the trend for 2022. The bank rate is now 1.25% and deposit rates are 1%.
The Bank of Canada is ending the reinvestment phase of its asset purchase program and will begin quantitative tightening effective April 25, 2022.
What is quantitative tightening, otherwise known as QT?
QT is the allowance of Government of Canada bonds to mature and not be replaced. This will allow the size of the balance sheets to decline.
We have now hit a 30-year high with inflation and are recovering from the pandemic which has caused supply chain disruptions, work shortages, and periods of shutdown. We enter new uncertainty with Russia’s ongoing invasion into Ukraine, of which we can see its impact on the world in more ways than one. We are seeing spikes in oil prices, natural gas and other commodities, and we will continue to see inflation rise. The Bank expects inflation to remain well above its 2% target throughout this year – and expects its return to normal levels in 2024.
How does this affect you, the consumer?
This depends on several factors.
In order to qualify for a mortgage, you need to go through the “mortgage stress test.” The qualifying rate or “benchmark rate” currently sits at 5.25% or the rate thr bank offers you plus 2%. The testing rate is the higher of the two. The mortgage stress test was introduced in 2016 to insured mortgages, and uninsured mortgages followed suit in 2018.
I’m going to start off with “breathe,” it’s alright!
Don’t be convinced that you need to make hasty decisions on a house or a mortgage type and let me tell you why.
If you are in a fixed-rate mortgage currently, your rate will not change, and if you are in a variable rate mortgage, you can safely assume that your mortgage payment will increase by $25 per 100k balance remaining.
Please remember that more goes into determining what best fits your mortgage needs than rate only.
What type of mortgage best suits you?
Can you handle a bit of instability with your mortgage payments?
Do you need consistency with your monthly payments?
If you’re purchasing now,
Do you need consistent monthly payments for a variety of reasons? Then find a fixed mortgage that suits your needs.
Are you able to ride the interest rate wave with no need to worry about high penalties if life throws a surprise at you, while enjoying lower interests for now? Then find a variable mortgage that suits your needs.
It’s easy to get caught up in all of the jargon and mass hysteria, but for the record, the Bank of Canada has increased Prime to 3.2% today and in 2019 Prime was at 3.95% – rates are still at record lows.
All of this is confusing, scary, and makes the decision process difficult. Taking the time to sit down with a mortgage broker during these times is essential. The knowledge your broker brings to the table, along with having access to several lenders and mortgage options can have a positive impact on your budget and reduce your stress level.
Come work with a qualified and knowledgeable mortgage broker so that you can have an enjoyable and stress-free mortgage experience.