mortgage rates in Canada

Soaring Mortgage and Interest Rate Increases Are Making Housing In Canada Unaffordable

Over the past few years, there has been a lot of turmoil in Canada’s and the world’s economies, especially the housing market. Interest rates on bank loans and mortgages plummeted in the early days of the COVID-19 pandemic, but have seen a big increase recently as inflation in Canada continues at a fast rate.

With all the discussion surrounding the most recent Bank of Canada overnight interest rate hike to 2.5%, you might be wondering what this means, and how it could possibly affect home ownership in Canada. Specially, why do high interest rates cause mortgage costs to soar?

How Did We Get Here?

High inflation like we’re seeing in Canada right now doesn’t just have one cause. There are many factors at play here, including the following.

  • Supply Chain Disruptions

The pandemic had a massive effect on global supply chains. With lockdowns and people getting sick and being unable to work, production went down. The supply chains were also disrupted by other global events, tariffs, and sanctions.

For example, the war in Ukraine has affected the supply of some products, such as grains and plant oils. The price of household fats and oils is up 30% from this time last year partially because of the conflict.

  • Unbalanced Supply/Demand

Across the board, we are experiencing instability between the supply of products available and the needs of the population. Because of supply chain disruptions, less products are being made, even though the demand is still high for many of them. This makes the underproduced products more valuable, as well as drives companies to increase prices to see a profit.

  • Low Interest Rates

When the pandemic started in 2020, the Bank of Canada decided to lower interest rates in order to prompt people to spend more and engage in the economy.

When interest rates are low, it is easier for people to justify and pay off borrowed money, meaning that more people were taking out loans and starting mortgages. This ultimately resulted in price increases, leading to the inflation we are seeing today.

  • Hot Housing Market

The beginning of the pandemic, and even the past decade, has resulted in an opportune time to enter the housing market and get a mortgage. This is in part due to the low interest rates seen in these periods. But as more people bought, there became a shortage of housing, house prices increased dramatically. Canadian inflation was heavily impacted by these increasing house prices.

Again, we see how an imbalance in supply vs. demand can impact inflation. High demand without an adequate supply will lead to value and price increases, leaving prospective first time homebuyers unable to buy into the housing market.

How Can Raising Interest Rates Help Combat Inflation?

The thought is that if interest rates are increased across Canada, people will be less inclined to take out loans or mortgages because of the high interest rates. In order to get people to buy again, companies will need to lower prices to increase affordability.

Current Canadian mortgage rates are established by the Bank of Canada policy interest rate, currently sitting at 2.5%. This rate acts as a measuring tool for banks to set their own interest rates to lend and borrow amongst themselves. This rate will affect—and in this case, increase—the amount of interest that borrowers will pay.

What Will Happen to My Mortgage?

The increased Bank of Canada interest rate does have the ability to affect mortgage costs, but the kind of mortgage you have determines how you could potentially be affected. There are two kinds of mortgages that each will be impacted by higher interest rates differently: fixed rate mortgages and variable rate mortgages. Let’s compare the two.

Fixed rate mortgages – your interest rate will be the same for the entirety of your mortgage term, being on average two to five years in length. Usually, the shorter the term is, the lower the interest rate will be. There are benefits to both a shorter or longer term, depending on the state of the economy and inflation.

Overall, fixed mortgage rates offer a sense of security because you will know how much you’ll be paying until the mortgage term ends. There are some drawbacks, including a higher interest rate than a variable-rate mortgage, and even if the Bank of Canada interest rate decreases during your term, your mortgage payments will stay the same.

Variable rate mortgages have interest rates that vary depending on inflation and the prime interest rate. Normally, the initial rate on a variable mortgage will be lower than for a fixed-rate mortgage. As well, it may be possible to qualify for a larger loan if you opt for variable rates.

Because the variable rate fluctuates, your mortgage payments can rise and fall over the course of your term. This can be beneficial, as long as interest rates don’t climb too high. Out of the two options, it is more uncertain, as you will never know exactly what you’ll be paying in interest in the future.

To summarize, both kinds of mortgage will be impacted to some level by the interest rate hike, but there are ways to minimize the impact.

What happens if you can’t make your mortgage or vehicle payments? This podcast looks at foreclosure and repossessions and how to prevent them.

How to Keep Your Finances In Good Shape

The rise in interest has many people on edge about the state of their mortgage. The high cost of living coupled with rising interest rates can make it increasingly difficult to pay off your living expenses every month.

There are ways to help mitigate the effects of steeply rising interest rates. Everyone’s situation is different, but we’ve listed a few ideas that could potentially offer some help.

  • Cut expenses – If possible, it might be beneficial to try and spend less, so that you can use the money you save to pay off more of your mortgage or other loan affected by the interest hikes. To do this, you can try making a detailed monthly budget of your spending habits to have a clearer idea of your finances.
  • Strategize how you pay off debts – If you have more than one debt, it might be a good idea to try to pay down the debt with the highest interest rate first. That way, you will be paying less interest over time.
    • If you have a variable mortgage, you can debate switching to a fixed-rate mortgage. Or, if you have a fixed rate mortgage that will be renewed in the near future, you could opt to renew sooner if you think that the interest rates are going to be higher later on.
  • Stay smart – The last thing you want to do right now is make a spur-of-the- moment decision that could have a negative impact on your finances. Think your financial decisions through with care, and try not to borrow any money that you can’t see yourself paying back confidently. The most important thing to do is to stay aware of your financial situation, as well as the economic situation in Canada and beyond.

These are just a small number of the ways that you can help your finances through this period of high interest rates. If you are finding yourself struggling with stress and an inability to pay off your debts with the increasing interest rates, feel free to contact us here at Chase & Associates. We can help advise you through this tough time and give you the tools you need to feel more secure in your finances.

Contact Us – We are Here to Help!

Too much debt can create all kinds of problems; from financial, to emotional, to relationships.

At Chase & Associates, we offer a free initial assessment where we will analyze your finances and provide you with information on what options are available to you. This appointment is confidential and non judgemental.

Filing a Consumer Proposal or a Bankruptcy in Canada is designed to provide the honest unfortunate person a fresh financial start. Contact us to set up your appointment today and we will take the time to answer all of your questions.

Shirley Tomyn

I have been working in the insolvency field for over twenty years. Prior to joining Derek L. Chase & Associates I worked with a Campbell River based financial advisor and the Vancouver Stock Exchange. I look forward to the yearly professional development courses that promote increased knowledge in the insolvency field.