When it comes to mortgage rates, 2023 was certainly historical. While not quite as shocking as last year’s 400 basis point increase, 2023 saw an unexpected increase of 50 basis points from the BoC. This all comes as part of the Bank of Canada’s continued efforts to correct the inflationary effects of COVID-19 stimulus programs.
When a lender provides a borrower with a mortgage loan, they are taking on a huge financial risk. To mitigate this risk, and ensure they also profit off of the transaction, lenders charge their borrower interest payments, as dictated through a mortgage or interest rate. This rate represents the percentage of the borrower’s principal amount that they must pay to the lender— on top of their original loan amount in the form of regularly scheduled payments.
The overnight lending rate, sometimes called a benchmark rate, is the base rate upon which other institutions determine their individual interest rates. Put simply, the benchmark rate represents the minimum interest rate that lenders can charge borrowers. When the Bank of Canada raises this rate, interest rates increase across all Canadian variable-rate mortgages, regardless of lender.
During the economic crash at the onset of the COVID-19 lockdowns, the Bank of Canada lowered the benchmark rate to near-zero to “jump-start” the economy. While this action did incentivize consumer spending and helped the economy recover, it did trigger a number of negative side effects. The most damaging effect of these policies has been the ridiculous increase in inflation.
Typically, the rate of inflation should be similar to the benchmark rate. Throughout 2022, the inflationary rate hovered around 7%, while the overnight rate remained far lower. Despite continued hikes to the overnight rate, Canadian inflation has remained volatile in 2023—2.8% in June, 4.0% in August, and 3.8% in September. As a result, the Bank of Canada has not yet begun rate cuts, in an effort to curb inflation.
In March of 2022, the BOC raised its overnight lending rate by 0.25%. This was the start of many raises to come.
In April of last year, the Bank of Canada raised the overnight rate by a total of 0.5 percentage points, followed by another half-point spike in June. The Bank of Canada further raised its overnight rate to 2.5% on July 13.
To counter increasing inflation, the Bank of Canada raised the overnight rate to 3.25% and the bank rate to 3.50% on September 6. A subsequent raise followed in October, bringing the rate to 3.75%, and a final seventh hike of 0.50% on December 7 bringing the overnight rate to a whopping 4.25%.
Given the intensity and frequency of these rate hikes, many believed that rates would begin to come down in 2023. Unfortunately, this was not the case. Canada saw two quarter-percentage point hikes this year, in June and July—respectively.
When negotiating the terms of your mortgage, you may be given the choice between fixed and variable rates. These will determine the percentage of your loan you will have to pay in interest on top of your regular payments.
Fixed rates remain stable throughout the entire duration of your mortgage term, while variable rates fluctuate based on the current benchmark rate. When rates are low, fixed rates are more favourable. When rates are high, variable rates may be a better option in the long run.
Most first-time homebuyers prefer fixed rates because of their reduced risk. When you enter into a fixed-rate mortgage contract, you can rest assured that your rate will remain the same, even as market interest rates fluctuate or increase.
Opting for a fixed-rate allows you to lock in your current loan rate and save yourself a lot of money in the case that interest rates go up significantly over the term of your mortgage. This is also a great way to ensure consistency in your monthly payments, making planning ahead far more manageable than with a variable rate.
However, given the current high rates—and the potential they have to drop in the next two years—you may want to consider opting for a variable rate mortgage.
For more information on how to navigate the current real estate market, check out our guide for first-time homebuyers.
Many homeowners are asking how much higher interest rates may climb after the most recent hike. Anyone with a mortgage, whether fixed or variable rate, may be impacted for the next ten years or longer by interest rate fluctuations.
In order to combat inflation, the Central Bank of Canada is adamant about applying the brakes on the economy as a whole. Unfortunately, there is no question that this will cause many people distress. To experience another prolonged period of low interest rates, however, low inflation is fundamentally necessary.
Eventually, the Bank of Canada will have to start decreasing rates again to boost the economy and bring us out of a potentially catastrophic recession. This means lower mortgage interest rates. According to Bank of Canada projections, rates won't start to decline until early 2024 when inflation has subsided sufficiently. Once rates start rising again, we can expect to see home prices grow steadily.
Beyond interest rates, there are many other factors at play. Rental prices are soaring—leading to investor buy-in to the market, our housing supply has remained low, and we are expected to welcome 1 million new immigrants into Canada by the end of 2023. All signs point towards a future boom.
Despite the current market conditions, you should not let yourself be deterred from buying real estate. With access to a network of over 60 different lenders, our Clover Mortgage brokers can help you find the lowest rates available — even under the current hikes. Contact Clover Mortgage to book your free consultation today!