The Bank of Canada has just raised its key lending rate by 25 basis points, citing… This marks the first change to the Bank’s overnight target rate in two years and the first rate hike since October 2018. In its statement accompanying the decision, the Bank said: “As the economy continues to expand and inflation pressures remain elevated, the Governing Council expects interest rates will need to rise further.” The Bank added that inflation is expected to be higher than projected in the near-term. “Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards.”
What happens now? Banks and other financial institutions are expected to follow the Bank of Canada’s lead and hike their prime lending rate–or prime rate–which is used to price variable-rate mortgages and personal and home equity lines of credit (HELOC). Once the prime rate rises, existing variable-rate borrowers will see their rates increase. This will result in a slightly higher monthly payment, or for variable-rate borrowers with fixed payments, more of their payment will go towards interest cost while less will go towards principal repayment. For example, the increase to your mortgage payment per $100,000 is approximately $12-$13 per 0.25% increase in prime on a 25 year amortization. If you have a fixed-rate, you will see no change to your rates. If you’re concerned about the impact rising rates may have on your financial situation, give us a call so we can discuss your options!