The Bank of Canada has steadily raised their benchmark interest rate over the course of 2022, but will their rates keep going up over the next year?
In this article, we’ll explore what’s next for interest rates in Canada. We’ll also see how they will affect rising mortgage rates, and how you can better protect your mortgage rates from uncertainty.
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Interest Rates Could Rise Even Faster and Higher than We Thought
With inflation the highest in decades, and the housing market the most expensive… well ever, the Bank of Canada raised interest rates. The point of this is to sooth the market and avoid an economic downturn down the road.
In a previous article, we looked at why the Bank of Canada has raised interest rates. In this article, we’ll go deeper into what you can expect next. But for reference let’s answer a few questions about interest rates.
What Happens When Interest Rates Rise?
When interest rates increase, it makes borrowing much more expensive. This means customers have less money to purchase products and services since they’d have to pay higher interest rates on that borrowed money.
As a result, businesses selling products and services must charge less and this helps to cool inflation.
Will Mortgage Interest Rates Rise with the Benchmark Rate?
Since the Bank of Canada is where Canada’s major banks borrow money, when they raise interest rates, banks follow suit. However, this doesn’t necessarily mean your mortgage payments will increase.
How Much Will Interest Rates Go up in Canada?
The rapid rise of inflation is an issue for countries across the globe, not just Canada. That means there are simply too many variables to give a firm answer to this question.
However, labour markets around the world remain tight, while demand for goods and services is high. Since these are the main forces causing inflation, and since they don’t seem to have a quick fix in the near future, inflation will remain an issue for the world in the years to come.
How Much and How Fast Will the Bank of Canada Raise Interest Rates?
On September 7, 2022, The Bank of Canada released a statement saying, “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further.”
The use of a strong language by Canada’s central bank is the clearest sign they will use whatever means necessary to avoid a major economic downturn down the road. That means borrowers can expect rising interest rates in the foreseeable future.
In other words, rates will continue to climb, and they may climb more than three decades of rate hikes. With that said, the BoC is aware that if they hiking rates too quickly can hurt the economy too.
We can however look to the last 5 rate hikes for some idea as to what will happen next:
- September 7, 2022: 3.25% (+0.75%)
- July 13, 2022: 2.50% (+1.00%)
- June 1, 2022: 1.50% (+0.50%)
- April 13, 2022: 1.00% (+0.50%)
- March 2, 2022: 0.50% (+0.25%)
What Will Interest Rates be in 2023 Canada?
Yes, things seem to be moving fast, but the BoC has released the schedule for their upcoming rate announcements:
- October 26, 2022
- December 7, 2022
- January 25
As mentioned previously, because high inflation is a global problem, there are too many variables to make a firm prediction. But assuming the financial situation plaguing economies remains consistent in the coming months, you can most likely expect lending rates to rise between 0.25%-0.75%.
That means January 1st of 2023 could see the bank rate rise to between 3.75% to 4.75% depending on the broader economy and global events like the war in Ukraine.
Are Mortgage Rates Going up in Canada?
So with all this talk on inflation and interest rates, what can we expect in Canada’s housing market?
First let’s establish that mortgage rates are made up of two main parts:
- Principal, i.e. the listed cost of the home
- Interest, i.e. the banks surcharge for lending you money
Because the Bank of Canada raised rates to borrow money, the prime rate given to borrowers of Canada’s major banks rose in tandem. That made the interest on mortgage rates rise over 2022. This higher interest on mortgage rates cooled the overheated housing market.
In other words, though the listed price of a home is dropping, the long-term cost paid with interest remains the same.
That means mortgage rates in Canada are stabilizing, but not necessarily going down. Demand for more housing in Canada is still very high. This will continue to put upward pressure on the market for years to come.
- You might also like: How to Avoid Mortgage Stress Test: What Canadians NEED to Know
Will Mortgage Rates Go up in the Next 5 Years?
For people currently putting their money in savings accounts in hopes of buying a home in the next five years, don’t expect the price of a home to suddenly drop.
Although the “unsustainable growth” (as the Bank of Canada puts it) of house prices may stabilize due to higher interest rates, this is at the expense of higher interest rates, and in order to qualify for a mortgage, home buyers need to afford both parts of mortgage rates.
How Will Rising Interest Rates Affect People with Mortgages?
For people that already have a mortgage and are nervous about the cost when it’s time to renew, there are a few things to consider.
Fixed Rates
Fixed rate loans are rooted in the Canada bond market. That means these mortgages are less prone to changes in the Bank of Canada’s interest rate. In fact, since bond markets are viewed as a stable place to store investment capital, financial markets flock to them in times of economic uncertainty.
In other words, as interest rates go up, bond prices fall. That means the cost of fixed-rate loans might actually get better over the next 5 years. However, this is only speculation.
Lastly, these mortgages do not change over the duration of term meaning you will not see a rise in your fixed mortgage rate until it’s time to renew. You have a fixed interest rate.
Variable Rates
As the name implies, a variable rate will vary. This type of mortgage is rooted to your lender’s prime rate, which, as mentioned earlier, is itself rooted in the Bank of Canada’s benchmark rate.
That means as the Bank of Canada hikes rates, the interest you pay will increase also. With that said, this doesn’t also mean a higher mortgage rate. Most of the time, these mortgages will keep your payments the same, simply putting more of the payment towards the mortgage interest rather than the principal.
On the other hand, if you have an adjustable rate mortgage, you WILL see an immediate increase in the mortgage rate.
How to Protect Your Mortgage from Uncertainty
Given the grim talk on interest rates moving forward, there are many ways to better protect your mortgage:
1. Consider a Fixed Rate Mortgage
Although data over the past 50 years shows mortgages with a variable rate tend to cost less in the long run, you are still at the whims of a rising interest rate from the BoC. This is especially true for adjustable mortgage rates. Depending on your income, this mean too much all at once.
Fixed mortgage rates give you complete certainty that your interest rates will stay the same over the course of the term, and since these mortgages are influenced by low-risk bond prices, you might be able to get a great rate!
If you currently have a variable rate, you are likely able to switch to a fixed rate. But be forewarned, once its a fixed rate you will be unable to switch back until the term is complete.
2. Make Larger Payments
Find out if you can pay off your mortgage faster by making more substantial payments. Since interest builds over time, the sooner you pay off your mortgage, the less interest you’ll need to pay over all.
Just make sure to read the fine print of your mortgage before-hand as many banks will charge hidden fees and penalties for doing this (particularly with fixed-rate loans).
With that said, we don’t recommend this approach if it means less money in your savings accounts. Only do this if you can cut back on frivolous spending. DO NOT take it from your rainy day fund as that will defeat the purpose of preparing for uncertainty.
3. Have a Plan for Job Loss or Income Changes
A souring economy often means businesses are forced to layoff employees. This time however that may not as much of a problem as the downturn is more influenced by supply issues than demand. In other words, businesses across Canada are struggling to find enough employees, so it’s not as likely we’ll see major layoffs in the near future.
However, layoffs are by no means the only thing that could hurt your family’s income. Serious injuries or the accidental death of a loved one are still just as possible. In fact, since businesses are rapidly hiring and desperate to satisfy demand, it’s very likely debilitating workplace injuries or worse may rise over the coming years.
Regardless to whether or not a loss of life was accidental, life insurance is a very smart decision for people working in dangerous fields and families that rely on a sole income provider.
Life insurance means you have complete certainty you will still be able to afford to live in your home even if the worst was to happen.
Key Takeaways
- Canada’s central bank has steadily raised interest rates over the past year
- Many speculate that this will lead to a market correction due to higher mortgage rates
- Interest rates are expected to rise further in the next year, potentially faster than in recent memory
- Canadian mortgage rates have two parts: the listed price (principal) and the interest charged by the bank
- As the benchmark interest rate rises, so does the interest rate on variable mortgages
- Borrowers can protect their mortgage from uncertainty by considering a fixed rate mortgage or by making larger payments
- It’s also wise to plan for job loss or income changes, so your family’s will always afford their mortgage
- One way to prepare for this is by getting life insurance
Life is Unpredictable. Protect Those You Love.
When times are tough, it’s important to prepare for the worst. If something happens to you or the breadwinner of your family and you’re not able to make your mortgage payments, your family could lose their home.
Life insurance makes sure that doesn’t happen. Life insurance is one of the best ways to protect the people you love. It gives your family the security they need to keep your home even if you’re no longer around.
And unlike with banks, a policy from Mortgage Insurance Group WILL NOT lose its value as you pay off your home. That’s because these plans were designed to protect your family first, not the banks!
Plus, the benefit your family receives can be used however they see fit. Considering the average funeral cost in Canada is rising too, final funeral expenses being fully covered is something your family will truly appreciate!
Don’t wait until it’s too late!
Click the blue button below to find out how little you could be paying for complete security for your loved ones.