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Variable-Rate Mortgage Holders Face More Challenges

Variable-rate mortgage holders are in for “more pain” following the Bank of Canada’s decision to raise interest rates once again. The central bank believes that the current monetary policy is not restrictive enough to bring supply and demand back into balance and sustainably achieve the 2% inflation target. This decision will have implications for borrowers with adjustable-rate mortgages as their payments will increase. Those with static payment variable rate mortgages will have their amortizations extended even further than before.

Strong Economic Data Supports the Rate Hike

The Bank of Canada’s decision was driven by robust economic data, including a rise in CPI inflation for April. After five months of deceleration, headline inflation increased to 4.4%, primarily due to higher rents and mortgage interest costs. Additionally, the Canadian economy added more jobs than anticipated in April, keeping the unemployment rate steady at 5% for the fifth consecutive month. These positive economic indicators influenced the central bank’s decision.

Analysts Predict Another Rate Hike in July

Analysts, such as BMO’s Benjamin Reitzes and RBC’s Josh Nye, expect further rate hikes in the near future. Reitzes described the Bank of Canada’s statement as “pretty hawkish,” considering the strong data. He believes that if the incoming data continues to support the current trend, another 25-basis-point rate hike in July is likely. Nye concurred, highlighting the importance of upcoming data releases in determining the need for additional rate increases.

Adjustable Rate Mortgage Borrowers to Experience Financial Strain

The decision to raise interest rates will result in increased financial difficulties for variable-rate mortgage borrowers. Those with adjustable-rate mortgages will see their monthly payments rise, while individuals with static-payment variable rates will face an extension in their amortization period. Anybody who has an upcoming mortgage renewal is more likely to be faced with an elevated renewal rate than previously. This news may cause some slowdown in the housing market and an extended period of financial strain for borrowers.

Financial Institutions Expected to Follow Suit

As is standard practice, financial institutions are anticipated to follow the Bank of Canada’s lead and raise their prime lending rates. This increase will impact variable-rate mortgages, as well as personal and home equity lines of credit (HELOCs). The prime rate will rise to 6.95% in the coming days, reflecting the changes in the central bank’s policies.

Bond Yields Reach 15-Year Highs

Prospective buyers seeking fixed-rate mortgages will also face higher rates due to recent rate hikes by multiple lenders. The surge in bond yields following the Bank of Canada’s decision is expected to contribute to further rate increases. The Government of Canada 5-year bond yield reached a 15-year high of 3.75%, with similar highs observed in the 2- and 3-year bond yields. This spike in bond yields indicates that mortgage rates will likely increase by the end of the week, making it more challenging for buyers to afford homes at current prices.

Implications for the Housing Market

The continuous rise in fixed rates and the prospect of further rate hikes have significant implications for the housing market. Higher mortgage rates will make it more difficult for potential buyers to enter the market at current price levels. It could be that the belief that the Bank of Canada had finished raising rates had motivated buyers earlier in the year. However, the prospect of sustained higher rates may dampen the fear of missing out (FOMO) that has been driving market activity in the first half of the year, especially in the country’s largest markets.



Josh Tagg has been the owner of Mortgages For Less since 2006. During that time Josh has developed a reputation for being an industry leader and advocate for client education.



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