My Analysis of the Bank of Canada Interest Rate Hike
  
The Bank of Canada increased the Overnight Lending rate by .75%. Banks immediately increased their prime rates by the same amount.
Adjustable Rate Mortgage (ARM) payments are affected. The mortgage payment will change in lockstep with the interest rate hikes, unlike Variable Rate mortgages where payments do not change. ARM payments will increase by $39 for every $100K, meaning that a mortgage of $700K will increase by $273/month.
All pre-approved variable mortgage rates will also increase. You can not lock in a prime rate on a pre-approved mortgage. The rate goes up and the qualifying rate increases. Meaning any pre-approved borrower has had their purchasing power decrease by 6-8%.
The Bank of Canada has hoped for a soft landing for the economy, but their actions and words say that they’re not worried about that. In their press release they mention the need for further interest rate hikes to calm inflation.
Since the BoC announcement, Canada's economy shed jobs for the third month in a row in August, losing a net 39,700 jobs, entirely in full-time work, Statistics Canada said on Friday. The jobless rate climbed to 5.4%.
During the announcement, the Bank of Canada referenced a survey that states that short term inflation expectations are still up, despite sharp price reductions in oil and gas, a return to normal prices for wheat, soy and other foods. Used car prices have also come off their peak. They reference that natural gas prices have increased as a justification for interest rate hikes. Russia is a major producer of natural gas, and they have cut off some countries, which will force the price to increase since the supply is cut. No amount of interest rate hikes will increase natural gas supply.
Further to their reasoning, the BoC mentions that although gas prices are coming down, other services are still elevated, meaning that inflation will continue to rise. I think it’s a bit flawed, because many services and products are based on the cost of production, and a big portion of that is the cost of gas and transportation. We will see softening in the prices as the lower gas prices absorb into those goods and services.
The way it has been explained to me is that entrenched inflation is much worse overall than a recession. Inflation is a long-term and prevailing problem. A recession is not.
The next Bank of Canada meetings are on Wednesday, October 26, 2022 and Wednesday, December 7, 2022. Mark them in your calendar and watch this space for predictions and guidance. Right now the market is predicting another 50 BPS hike in October, and then that will be it for the year.
What’s your opinion? Is this when the economy throws on the brakes and causes the Bank of Canada to revert course? Have they gone too far?
The ground is moving for many borrowers. I’m here to help. Please reach out if you need help with your mortgage financing needs.
Trigger Rates are Here for Some
I’ve spoken to a few different clients who choose a variable rate mortgage between March 2020 and March 2020, and some their mortgages have hit their trigger points. Others have not, but will with another rate increase.
The trigger point happens when the interest rate has risen on a variable rate mortgage and the static payment now doesn't cover the required interest.
It seemed so far-fetched a few short months ago that we would approach these rates in 2022, but here we are.
For most variable rate borrowers that have hit their trigger points, their bank will automatically increase their payments in order to cover the interest deficiency in their payment.
These borrowers are now not paying any money towards their principal. They may also consider putting a lump sum payment or increase their mortgage payments further in order to pay down their mortgage. When rates go back down, they will resume paying down their principal.
Another option, would be to convert their variable rate mortgage to a fixed rate. Considering shorter term mortgages (1, 2 or even 3-year terms) could be a way to get off the variable rate rollercoaster and wait for interest rates to settle down in the coming months/years.
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