In a surprise move, the Bank of Canada (BOC) has announced a 100-basis points increase to its main interest rate. This means the policy rate has now risen from 1.5% to 2.5%, the biggest rate increase since 1998. This also means the central bank has raised its rates by a total of 2.25% thus far this year.
This move was unexpected as about three-quarters of economists had predicted that the incoming increase would be by 75 basis points to curb inflation. This larger-than-expected increase has however received much support from experts.
Governor Tiff Macklem stated that though the steep hike was an unusual move, it reflected the exceptional circumstances the country was in and that the government was prepared to be more forceful. The central bank has stated that excess demand, tightening labour market, high inflation across the sectors, and rising consumer expectations of persistent price gains had prompted the hike. The Governing Council expects that there will be a need to raise interest rates further but that the pace of increments will be guided by the Bank’s ongoing assessment of the economy and inflation.
First-time homebuyers are being advised to brace themselves from the impact this interest rate hike will have on their ability to borrow. President of CanWise mortgage lender, James Laird, has said that prime lending rates at all financial institutions can be expected to rise by the same 100 basis points. He recommends those with variable rate mortgages to start calculating what their new payments will be with the hike and budget accordingly. Those on fixed mortgage rates can expect to be unaffected until their next renewal date when they can expect to start paying more.
First-time home buyers are expected to face a bigger challenge in qualifying for a mortgage following the interest rate hike. This applies whether they are seeking a variable or fixed rate mortgage, with their stress test expected to be at around 6-7%. Laird estimates that those that opt for a variable rate will qualify for more funding.
There may however be some relief to be had for this demographic from the federal government’s new tax-free First Home Savings Account (FHSA) proposal. This plan will allow young Canadians to save up to $40,000 they can put towards buying their first home. The contributions they make towards the account will be tax-deductible, with any funds not used in home purchase being allowed to be transferred to their Registered Retirement Income Fund (RRIF) or RRSP, with no penalties or tax deferment.
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