The Bank of Canada (BoC) recently increased the overnight rate to 4.75%, signaling a shift after a temporary pause. This decision, influenced by a strong housing market, aims to balance supply and demand and maintain sustainable inflation. However, it poses challenges for homeowners, especially those with variable-rate mortgages or seeking renewals. Let’s break it down.
Housing Market Highlights:
The decision to raise rates stems from the robust housing market. Greater Vancouver saw a 15.7% surge in housing sales in May, with prices reaching $1,188,000, a 6% increase since January. Calgary also exceeded expectations with record-high sales and a 3% price increase compared to the previous year.
Why Did the Bank of Canada Raise Rates?
BoC’s move aims to prevent the economy from overheating. Previous measures were deemed insufficient to balance supply, and demand, and maintain inflation at 2%. Raising rates was seen as necessary to effectively address these concerns.
Impact on Homeowners:
Variable-rate mortgage holders, especially residential investors, may face negative cash flow due to increased mortgage costs. This could lead to forced sales and higher housing inventory. Homeowners seeking renewals might encounter challenges, including higher stress tests and limited options for better deals. First-time homeowners with fixed-rate mortgages during the pandemic may see renewal prices about 15% higher, while variable-rate holders might experience increases of up to 40%.
Conclusion:
The BoC’s rate hike reflects concerns about the economy, coinciding with a thriving housing market. While aiming for balance, it poses challenges for homeowners, particularly those with variable-rate mortgages and those seeking renewals. As the effects unfold, homeowners should carefully navigate the changing landscape of mortgage rates and assess their financial options.
Please contact Jared Gibbons, your local realtor, should you have any questions.