The Impact of Bank of Canada’s Interest Rate Hike on Canadian Households

The Bank of Canada’s recent decision to raise the interest rate to 5% will undoubtedly leave ripples across Canadian households, businesses, and markets. As economists parse through this decision, let’s dive deep into what this means for the average Canadian, particularly in the context of housing finance.

1. The Background

The interest rate hike is the latest in a series of measures the central bank has taken over the past year to contain inflation, which, although on a downward trend from its peak of 8.1% in June 2022, remains above the desired 2% target. Economic rebound from the Russian invasion of Ukraine and shifts in global raw material prices have led to more stable economic growth and a tight labour market.

2. Ramifications for Mortgage Owners

An immediate consequence of the rate hike is the increase in the prime rate, now sitting at 6.95%. This directly impacts homeowners, particularly those with variable mortgage rates or those nearing the end of their terms.

For many, this means a significant portion of their disposable income will now go towards servicing debt. As households grapple with these rising costs against the backdrop of an already high cost of living, including a 9% year of year rise in grocery prices, resilience becomes crucial.

3. The Bright Side

Despite the challenges, Canadian households have shown remarkable resilience. The housing market, for instance, has weathered these fluctuations. CMHC reports indicate a minimal number of mortgages in arrears, reflecting the financial stability of Canadian households.

4. How Are Canadians Adapting?

To cope with rising mortgage rates, many have shifted preferences:

1. Fixed-Rate Mortgages: Shorter-term fixed-rate mortgages between one and five years have gained popularity. This reflects a sentiment that interest rates might decrease in the near future.
2. Amortization Periods: Households are increasingly opting for longer amortization periods, with periods greater than 25 years now being common. This helps reduce monthly debt servicing costs.

5. The Impact on Home Financing Tools:

1. Reverse Mortgages: These offer homeowners, particularly seniors, an opportunity to access funds without monthly payments. With the rising Home Equity Interest Rates, the cost associated with Reverse Mortgages has seen a drastic uptick, especially in areas with high property values, such as Home Equity in Vancouver.
2. Home Equity Line of Credit (HELOC): Those with a HELOC will feel the pinch as the interest rates on these products are linked to the prime rate. As the Bank of Canada’s rate influences the Home Equity Interest Rates, accessing funds via HELOC becomes much costlier.
3. Imagine Living: Amidst these changes, the Imagine Living membership offers a stable and viable alternative for homeowners as it is unaffected by interest rate hikes. As traditional borrowing means become less favourable, such memberships could provide consistent value.

6. Beyond Mortgages: Other Credit Instruments

Rates for both secured and unsecured lines of credit are bound to rise, given their connection to the prime rate. However, credit card interest rates, averaging around 19.99%, remain largely unaffected.

7. What Lies Ahead?

The Bank of Canada’s ongoing strategies hint that we might not see another interest rate hike soon. The current rate may well remain for the rest of the year. Come 2024, both inflation and interest rates are expected to soften, providing potential relief to Canadian households.

In conclusion, while the rate hikes introduce new challenges, they also underscore the importance of informed financial decision-making. Whether it’s considering a Reverse Mortgage Loan, gauging the utility of a Home Equity Line of Credit, or exploring the benefits of the Imagine Living membership, the path forward requires careful navigation and resilience.