Mortgage Logic

Bank of Canada raises Key Rate 0.5% – What You Need to Know

Today the Bank of Canada (BoC) raised its key rate by 50 basis points to 1.0%. The Prime Rate of interest at major Canadian FI’s will follow suit and raise their rates to 3.2% from 2.7%.

Here is what’s important to know:

1.) Mortgages in Canada have been qualified at a rate that has hovered around 5% (Benchmark Rate) since 2010. The effect on existing fixed rate mortgages will be non-existent.

2.) People in Variable (Adjustable) rate mortgages have typically enjoyed their mortgage rate being in the 1-2% range over the past two years, prior to that, in the 1.5-2.50% range. If you are in a variable rate mortgage, your rate will gradually go to the 3-3.5% range when all of the bluster of higher BoC rates is over. Everyone’s situation is different and some may feel the need to lock into a fixed rate. Stay the course do not lock into a fixed rate at this time. You should not need to convert into a fixed rate unless you have onboarded new consumer debt over the past few years. Not sure? Call our office and we will help to decipher your situation. Again; know that your mortgage was underwritten using a Benchmark Rate in the neighborhood of 5%.

3.) The BoC really feels the need to lift its key rate right now because of inflationary pressures. Experts have been predicting overall rate hikes (starting March 2, 2022) of 1-1.75% over the next year to year and a half.  As of now, the BoC has lifted its key rate since March 1 by 0.75%, much faster than expected.

4.) In line with its strategy, BoC has announced that it will stop buying debt from the market (stopping the expansion of money supply) effective April 25. We believe that this along with lifting their Key Rate will quite quickly put downward pressure on inflation and that future rate hikes may be muted. We believe that the “neutral rate” that the BoC is trying to arrive at will not be 2.5% but rather closer to 2% or even less. Just prior to the pandemic the BoC Key Rate was 1.25% (February 2020).

5.) The awful war instigated by Russia on Ukraine is not directly affecting core CPI.  Inflationary fuel prices that have been instigated by the current US federal administration and further exacerbated by the war in Ukraine are not included in the core inflationary rate.  Higher energy prices are in fact benefitting the Canadian economy.

For all of your personal and business financing needs, contact us at Mortgage Logic.