Introduction: Variable-rate mortgage borrowers in Canada have been grappling with soaring interest costs, witnessing a staggering 70% increase over the past year. Recently, they were dealt another blow as the prime rate surged to a 22-year high of 7.20%, following a 25 basis points increase in the Bank of Canada’s overnight target rate. This blog post explores the implications of these hikes, the adaptability of variable-rate borrowers, the challenges faced by different mortgage types, and the possibility of further rate increases.

The Impact of Rate Hikes on Borrowers: With each quarter-point increase in interest rates, variable-rate mortgage holders experience an additional burden of approximately $13 per month for every $100,000 of mortgage debt. Considering that variable-rate borrowers constitute about a third of the mortgage market, the financial strain is significant. For the average borrower with a mortgage size of around $312,000, this translates to roughly $820 more in monthly interest costs.

Borrower Resilience Amidst Rising Costs: Despite the steep rise in borrowing costs due to the 10 Bank of Canada rate increases, variable-rate borrowers have displayed remarkable resilience. Many have creatively managed the increases by either locking into a fixed rate early, refinancing to extend their amortization and lower payments, or reducing their overall mortgage and debt load. Despite the challenges, property owners have not rushed to sell their properties to escape mounting payments.

Challenges Faced by Different Mortgage Types: While adjustable-rate mortgage holders have seen their monthly payments surge by over 50%, those with static-payment variable-rate mortgages face a different dilemma. With fixed-payment variable rates, the monthly payment remains constant, but the portion allocated to interest increases, while the amount dedicated to principal reduction decreases. This has led to an extension of the average amortization period, raising concerns among regulators.

Potential for Further Rate Hikes: Economists are closely monitoring the economic data as the Bank of Canada considers the possibility of another quarter-point rate hike in September. The decision will hinge on economic performance and inflation progress relative to the Bank’s forecasts. If this hike occurs, the overnight target rate could reach 5.25%, implying a prime rate of 7.45%, a level not seen in Canada since 2000. The financial markets are already anticipating this move, with bond markets indicating a 75% likelihood of another 25-bps hike in September.

Conclusion: For variable-rate mortgage borrowers, the current financial landscape poses both challenges and opportunities. The sharp rise in interest costs calls for innovative financial management strategies to ensure sustainable cash flows. As the possibility of further rate hikes looms, borrowers must remain vigilant and adapt to changing economic conditions. Understanding the implications of rising rates will empower mortgage holders to make informed decisions and navigate the turbulent waters of the Canadian mortgage market.

By: Canadian Mortgage Trends.