On June 1, 2022, The Bank of Canada announced another increase in the overnight rate. Since March 2, 2022, there have been three increases in the overnight rate. As a result, the increases have put a damper on the demand for real estate in Canada, and especially in Toronto. Canadians who are still eager to buy real estate are encouraged to shop around and compare offers from different lenders, especially when home prices are at an all time high and interest rates are on the rise. It is now more important than ever to be strategic and look for interest rates that best suit your needs and consider what the interest rate forecast will look like in the years to come.
Why is the Bank of Canada announcing a rate increase?
When the economy is doing well, consumers will spend and take on more debt which benefits businesses. When demand goes up for products and services (including demand for housing) and exceeds the available supply, prices will necessarily have to increase and will result in inflation. The increase in interest rates is a strategic method that the Bank of Canada uses in order to protect the health of the overall economy. Increased interest rates discourage consumers from incurring more debt since higher interest payments result in less money in people’s pockets. When consumers reduce their purchases and create a decrease in demand, businesses can lower prices to encourage consumers to buy their products, which can help reduce inflation.
How does the rate increase affect those in Toronto?
The recent increases in the Bank of Canada overnight rate result in higher interest rates if you are taking out a mortgage. It also means you will be faced with higher interest rates if you have to renew your mortgage. If you’re a first-time home buyer in Toronto and are just starting out in the buying process, you should do your research and learn about the current mortgage rates offered by lenders. Toronto mortgage rates can change often and having an idea of mortgages available such as fixed vs. variable mortgages or different term lengths will help you understand what your overall budget and mortgage payments will look like. If you have already been pre-approved and have found a mortgage offer that you like, you can reach out to your mortgage advisor to discuss locking it in.
If you’re buying and already own property in Toronto, you might have the option to port your mortgage if your lender allows it, if your the interest rate on your current mortgage is more favorable than interest rates that are currently available. However, if your mortgage is not portable, it’s important when negotiating your mortgage terms with a lender or broker, to consider whether the new mortgage is portable, and whether it has pre-payment penalties. A pre-payment penalty can be imposed by a mortgage lender or broker if you sell your property before the mortgage term is up. Pre-payment penalties can equal up to three months interest on the amount you still owe on your mortgage. A pre-payment penalty can affect your decision to break or renew your mortgage early in the future.
How do interest rate increases affect me if I have a mortgage in Toronto?
Homeowners with a variable rate mortgage are directly impacted when the Bank of Canada increases its lending rates since banks will increase their Prime Rate since it costs more for them to borrow money. Although variable rates have been historically lower than fixed, you will need to be sure that you are able to cover higher mortgage payments when your variable interest rate rises. You might also have the option to renew your mortgage into a fixed or variable rate at or before your renewal date, but this could involve breaking your mortgage term which could result in a pre-payment penalty fee noted above. However, sometimes, you can still save hundreds or thousands in interest costs by renewing your mortgage with a fixed interest rate. For homeowners with an existing fixed rate mortgage, an increase in the Prime Rate will mean that when their mortgage term is up (mortgage terms are typically 5 years), they will be faced with a higher interest rate on their mortgage (unless interest rates decrease by the time their mortgage term is up) which means higher monthly mortgage payments.
What does the mortgage rate forecast in Toronto look like for the rest of 2022?
Unless there are mitigating circumstances like high inflation, the Bank of Canada usually avoids large rate increases in one period. So far in 2022, there have been the following Bank of Canada increases in the overnight rate:
March 2, 2022 – Overnight rate increased by .25% to .50%
April 13, 2022 – Overnight rate increased by .50% to 1%
June 2, 2022 – Overnight rate increased by .50% to 1.5%
TD anticipates that on July 13, 2022, the Bank of Canada will increase the overnight rate by .50% to 2%.
To give you an idea of how a small increase in the overnight and mortgage rate can affect the monthly mortgage payment, let’s look at a home that costs $1,000,000, which is the average price in Toronto. With a $400,000 down payment, the monthly mortgage payment for a $600,000 mortgage based on the current mortgage rate of 3.73% is $3,078. With an increase in the overnight and mortgage rate of .50%, the monthly mortgage payment would then be $3,244. An increase of 1% in the overnight and mortgage rate will result in a monthly mortgage payment of $3,414.
Securing a mortgage when interest rates are rising requires being careful to scrutinize the terms of your new mortgage before you sign. Hopefully, the above information will help you when you shop for your mortgage.
You might be interested in reading, “How To Earn Extra Cash When You Clean Out Your Home“.