The Bank of Canada capped off its 2022 interest rate schedule with another increase on Wednesday, with some Canadian mortgage holders paying roughly $1,400 more per month on their home loans following a year of aggressive hikes.
The central bank has increased its policy rate by four percentage points since March, marking one of the fastest tightening cycles in its history.
John Willis, financial planner at Meridian Credit Union, says Wednesday’s 50-basis-point hike is just the one hurdle Canadians will look at when recalculating their budgets to account for higher interest payments in 2023.
“If we think about the half-point increase today, that’s not so much the big deal. The big deal is the fact that we’ve had seven increases in 2022,” he tells Global News.
The Bank of Canada’s policy rate sets interest payments directly or indirectly for many types of debt — something Canadians have a lot of right now.
Equifax Canada said this week that total consumer debt hit $2.36 trillion in the third quarter, a 7.3 per cent increase year-over-year.
Ipsos polling conducted exclusively for Global News shows that higher interest rates are weighing on Canadians’ minds and bank accounts.
Some 71 per cent of respondents said they were worried interest rates would rise faster than they can keep up, according to the polling conducted Nov. 11-15. That’s four percentage points higher than a similar survey in October.
Millennials were especially likely to say they were concerned about the pace of interest rate hikes (85 per cent), as were households with kids (81 per cent) and those making less than $40,000 annually (79 per cent).
While rising interest rates have cooled Canada’s housing sector and brought down prices in many markets from the pandemic highs, Sean Simpson, senior vice-president of Ipsos Public Affairs, tells Global News these concerns make sense as the cost of carrying a mortgage grew more expensive through the year.
Those looking to enter the housing market, or who took advantage of low rates in recent years and are now facing higher monthly costs, are understandably fretting, he says.
“From an affordability standpoint, we probably haven’t made a lot of progress there. So it’s no wonder that younger people are feeling a little bit pessimistic.”
More expensive mortgages hurting affordability
The rapid rise in the cost of borrowing has been especially tough for holders of mortgages and other types of loans directly tied to the Bank’s policy rate.
Analysis from comparator site Ratehub.ca shows that variable-rate mortgages, which see their rates rise and fall in step with the Bank of Canada’s targets, have been hit hard in 2022.
Ratehub gave the hypothetical example Wednesday of a homebuyer putting down a payment of 10 per cent on a $748,450 home in January of this year — the average price at the time in Canada — and getting a five-year variable rate of 0.90 per cent amortized over 25 years.
The buyer’s monthly mortgage payment would’ve been $2,585 at the time.
But factoring in the Bank’s interest rate hikes since March, as of Wednesday they’d be paying a mortgage rate of 4.9 per cent with a monthly payment of around $4,000.
That’s up $1,415 monthly with a total cost of $16,980 stretched out over a year.
Not all variable mortgages see payments immediately rise with higher rates, but those with fixed payments do have trigger rates to keep in mind – the point at which a lender might ask a holder to pay more or readjust their terms to pay down more of the principal loan.
Before the hike on Wednesday, the Bank of Canada had estimated half of mortgage holders with these kinds of loans had hit their trigger rates.
Fixed-rate mortgages see payments hold steady for the length of the term, but adjust to new interest rate environments when they’re initiated or renewed.
Global News asked Ratehub to conduct a similar analysis to its variable-rate mortgage example on fixed-rate options at the start and end of 2022.
Someone buying the same home as the first example in January could have secured a five-year fixed-rate mortgage of 2.39 per cent for a monthly mortgage payment of $3,073, based on a 10-per-cent downpayment and the lowest rates available at the time.
Fast-forward to Wednesday, a homeowner buying a home worth $644,643 — the average price in November as the Canadian housing market has cooled — could secure a five-year fixed-rate of 4.69 per cent with a monthly mortgage payment of $3,374.
The difference here is $301 more a month, or $3,612 on an annualized basis.
Meridian’s Willis says that Canadian homeowners are likely not accustomed to interest payments eating up this much of their budget.
“We haven’t seen rates this high in 15 years. They are considerably higher than what most of us have become used to,” he says.
Non-mortgage debt also hurting Canadians
Aside from the mortgage itself, Willis says many Canadian homeowners are also feeling the burn on the home equity lines of credit (HELOCs), which are common sources of funds for home renovations and other big expenses.
Willis says that a homeowner with a typical HELOC of $100,000 would have seen their rates rise from three per cent a year ago to seven per cent today, working out to roughly $300 more in payments each month.
Equifax Canada said in its report this week that average non-mortgage debt rose to $21,183 for the highest level since the second quarter of 2020, with early signs of strain starting to show in auto loans and credit cards.
If you’re one of those Canadians with a large outstanding balance on your credit card — one of the most expensive kinds of debt — Willis recommends calling your bank or provider and seeing if you can switch that to a line of credit with a lower rate.
Typical credit cards will sport interest rates of 20-to-24 per cent, he says, but some options could cut that rate in half, down to 12 per cent.
For those watching their mortgage payments balloon or are nearing their renewal date, Willis also advises calling your mortgage professional to see if you can get some flexibility on payments during the leaner days of higher interest rates.
“Sometimes you can skip a payment, sometimes you can add an extra payment,” he says. “Sometimes you can change the length of how long it takes to pay off the mortgage. So there’s a lot of options out there.”
— with files from Global News’ Anne Gaviola, Sean Boynton, and The Canadian Press
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