In January, the 30-year-old marketing and communications manager was paying about $1,600 per month for the variable rate mortgage she has on her downtown Toronto condo. Now, that monthly payment will be nearly $2,000.
“It’s been a big shock and a big change for me personally,” she told Global News Wednesday, shortly after the central bank’s announcement, which added about $200 to her payments alone.
“I’m also managing the mortgage by myself, so all of these payments come out from my paycheque.”
The key interest rate now sits at 2.5 per cent, a drastic shift from the 0.25 per cent rate seen at the start of the year, as the Bank of Canada tries to tame decades-high inflation that has sent prices skyrocketing.
The bank’s governor Tiff Macklem acknowledged Wednesday that higher interest rates will add to the difficulties that Canadians are already facing with high inflation, but said if inflation becomes entrenched it will be more painful for the economy — and for Canadians — to get it back down.
That comes as little comfort for Vijh. After being forced to adjust her budget to accommodate previous interest rate hikes earlier this year, she says she’ll once again have to find a new balance.
“Primarily it’s going to be cutting down on my day-to-day costs – dining out, groceries – finding places where I can basically cut costs. I’ll put more money towards my mortgage if I can, as well as through my savings,” she said.
“I’m also reconsidering my travel plans for the rest of the year, because travel is also extremely expensive right now, and I’m not entirely sure I can accommodate that given the mortgage rate increases.”
Wednesday’s one per cent hike — the largest single increase since August of 1998 — surprised most economists who were anticipating a 75 basis point increase in line with the U.S. Federal Reserve.
The hike means a typical variable rate mortgage of 2.7 per cent on a home priced at the national average of $711,000 would see monthly payments increase from $2,845 to $3,168 — a difference of nearly $325 per month.
Although Vijh’s mortgage rate is slightly lower at 2.55 per cent, she’s says she’s still feeling the squeeze. She also has 23 years left on her 25-year amortization, leaving her with roughly $384,000 left to pay off.
The rising interest rates this year have already started to cool off Canada’s white-hot housing market, with home prices seeing their first declines in nearly three years. Royal LePage has slashed its annual market outlook to just five per cent growth by the end of 2022, down from a projected 15 per cent earlier this year.
But that still leaves new homeowners like Vijh making increasingly higher mortgage payments on properties that are now starting to dip in value along with the market.
Macklem said Wednesday’s oversized rate hiked reflected “very unusual economic circumstances” of “too high” inflation and increased consumer anxiety, which requires drastic action to reverse.
The Bank of Canada also signalled that interest rates would need to keep rising before the end of the current cycle.
In a note, CIBC senior economist Karyne Charbonneau said the Bank of Canada raising its key rate to a peak of 3.25 per cent is now more likely.
The continued hikes is concerning to Vijh, who says she’s growing increasingly worried about her ability to save for her retirement.
“In January, I was probably able to put a little more toward my RRSP,” she said. “Today, I may have to reconsider how much I’m putting towards retirement and instead put that into my mortgage payments, or save it and put it toward a prepayment for my mortgage.”
Vijh says she wants people of her generation who also bought into the real estate market during the pandemic to keep a close eye on their expenses, particularly as the potential for more interest rate hikes looms.
“I’m sure a lot of them took the opportunity, like I did, to get into their first home in 2020, 2021, and are now being faced with pretty steep increases in their mortgage costs,” she said.
“It’s going to be very important for us to re-examine how we spend and save, and get into these new changes.”
– with files from Global News’ Craig Lord