Economists are predicting Canadians might see another interest rate hike next week and say homeowners who are already financially vulnerable will have a tougher time making mortgage payments.
Robert Hogue, assistant chief economist at the Royal Bank of Canada, told CTVNews.ca on Thursday that he is anticipating a hike of 25 basis points to be announced by the Bank of Canada on July 12.
Moshe Lander, senior lecturer in economics at Concordia University in Montreal, told CTVNews.ca on Thursday another increase is 鈥渘ot good news for borrowers of any kind,鈥� from those in the housing market to those with personal debt from student loans, for example.
The increase, Lander said, will mean some homeowners will be unable to finance their mortgage.
鈥淚nterest rates have gone up so much, so fast,鈥� he said. 鈥淏ut our incomes have not been rising in pace. So, more and more disposable income will have to go towards paying interest on our debt, let alone the actual debt itself.鈥�
The bank has raised its key interest rate eight times in less than a year, and this would be the third increase of 2023, making borrowing money more expensive.
A rate hike of 25 basis points would bring the , the highest rates in approximately 30 years, said Lander.
WHAT DOES THIS MEAN FOR HOMEOWNERS?
If the central bank announces a 25-basis-point increase, homeowners will pay more on their mortgage. Hogue said homeowners with a variable-rate mortgage will see a significant and instant increase.
According to , a homeowner who has put a 10 per cent down payment on a house that costs about $729,000, with a five-year variable rate of 5.80 per cent over 25 years will pay $100 more per month in mortgage payments. The in Canada in May 2023 was $729,044.
On the contrary, those with a fixed-rate mortgage will see an increase when their term expires.
Since not everyone鈥檚 mortgage terms expire at the same time, Hogue predicts this rate increase 鈥渃an have a little bit longer lag in terms of that monetary policy transmission to households.鈥�
James Laird, co-CEO of Ratehub.ca, advised people shopping for a home to get 鈥減re-approval to hold today's fixed rates for up to 120 days,鈥� according to an email sent to CTVNews.ca on Thursday.
鈥淚t鈥檚 best to plan for a 25-basis-point interest rate hike and be pleased if they hold,鈥� read the email.
Laird, who is also president of CanWise mortgage lender, said current homeowners with a mortgage up for renewal within the next year should seek out rates with a new lender.
This way, if rates jump again, owners can try breaking their existing mortgage and 鈥渟witch to that new lender before your rate hold expires to lock in the lower rate.鈥�
A BALANCING ACT
While the increase is still not confirmed, Lander said the adjustment comes as the Bank of Canada aims to balance economic growth with pressure from inflation.
In , the central bank wrote, 鈥渙verall, excess demand in the economy looks to be more persistent than anticipated.鈥�
Hogue explained hiking interest rates is meant to 鈥渃ool down鈥� demands from the markets, which can stem from both households and businesses, and balance it with production capacity.
鈥淲hen you have more demand than your ability to produce, it puts upward pressure on prices, which is basically what inflation is,鈥� he said.
Statistics Canada reported the annual inflation rate fell to 3.4 per cent in May from 4.4 per cent in April, largely due to lower gasoline prices compared to a year ago.
That's the lowest inflation has been since June 2021.
Ultimately, it is in the central bank鈥檚 policy mandate to maintain inflation at or close to two per cent, and hiking interest rates is a way to lower production demands, reduce inflation and achieve that goal, said Hogue.
Lander said inflation is 鈥渟cary, it鈥檚 confusing and can really destabilize an economy quickly.鈥�
That鈥檚 why the increase is not to 鈥減unish鈥� homeowners, 鈥渋t's purely to make sure that that terrible, terrible (inflation) genie does not get out of the bottle again,鈥� Lander said.
