Bank of Canada interest hike expected to create financial pinch for Calgary homeowners

The Bank of Canada announced Wednesday that it will raise its policy interest rate for the tenth time since March 2022, much to the dismay of some Calgarians as the cost of borrowing becomes more expensive.

The 25-basis points hike brings the Bank’s overnight rate to 5 per cent, the highest it’s seen since 2001.

Jeff Batt recently purchased a home in Calgary and like many others, he’s now feeling the pinch of increased costs to his mortgage payments.

"We started out on a variable rate, and we were sitting around two per cent when we first got our house, but now we're up around six and a half percent just because of all the inflation, and it's almost tripled our mortgage rate," he said.

Batt adds that he had to start his own business and work six to seven days per week just to make ends meet.

The rising costs have forced him to look for a new home, but with rising demand in Calgary, he says it has been more difficult than ever to find an affordable place to live.

"We lost out on a house after putting in a bid of over $80,000 above asking price," Batt said.

"It’s just making it a lot harder for everyone that has been here living in the city and is trying to make that progression through life, but where everybody else is coming from out of town to snatch up all the houses like investors from Toronto."

In its Monetary Policy Report, the Bank of Canada says the rate increase was necessary to help slow economic growth and reduce core inflation. Three-month rates of core inflation have been higher than the Bank’s expectation, hovering around 3.5 per cent to 4 per cent since September 2022.

The central bank’s mandate is to keep inflation around 2 per cent, and its forecasters are currently predicting inflation will return to that level in the middle of 2025, two quarters later than previously projected.

Wednesday’s monetary policy report makes no mention of an interest rate pause, leaving the door open to another hike.  

MORTGAGE PAYMENTS TO INCREASE BY THOUSANDS OF DOLLARS: FINANCIAL EXPERTS

Sylvain Charlebois, a financial expert with the Agri-Food Analytics Lab at Dalhousie University, says the impact felt by this latest interest rate hike will cause mortgage payments to increase dramatically for those with variable rates.

"So if you have a $500,000 mortgage, you're likely looking at payments that that will go up by as much as $1,200 a month," he said.

"So what's happening right now in Alberta is that people are actually spending less on food as a result of higher interest rates and in lodging costs. It's easier to trade down when it comes to food than trending down when it comes to your own roof. That's really what's going on right now."

Keith Uthe, a Calgary mortgage broker with Mortgage Alliance, predicts that with this latest interest rate hike, a $400,000 to $450,000 mortgage will cost the average Calgarian about $75 extra per month.

"I think what’s also important is that people understand if you have a line of credit or anything based off the prime lending rate, whether that’s personal lines of credit or home equity credit, you’re going to feel the impact as well."

Uthe notes that those with variable mortgages will feel the brunt of this latest hike, but so will those who have a mortgage that doesn’t adjust.

"On a mortgage that doesn’t adjust, now they’re hitting what’s called their trigger rare on their mortgage, which means the amount of interest that they’re due to pay each month is not meeting the amount of payment that they have," Uthe said.

"So then they would be behind on the amount of payment due and they would need to increase the amount of payment to cover that interest."

Despite the increased costs, mortgage and housing expert with Rates.ca Victor Tran says mortgage delinquency rates will likely not see a big jump.

"The lenders are in the business to help customers out and, of course, ultimately to make money, so they're not in the business to foreclose on homes," Tran said.

"So yes, probably a slight increase in delinquencies, but we're probably not going to see massive amounts of foreclosures or anything like that."

Tran notes, however, that those in the process of renewing their mortgage should be proactive ahead of time. 

"Anyone that's coming up for renewal, assume they should consult with their current lender or a mortgage broker just to see what option are out there," he said.

"I find most Canadians will shop last minute, we're talking about a month or two before the renewal date, but you can shop around as early as four months prior to the maturity date or renewal date of the mortgage. That's 120 days in a rising rate environment, (it's) definitely advantageous to lock in a rate as soon as possible."

TIPS TO SURVIVE HIGHER INTEREST RATES AND INCREASING COSTS

Financial literacy expert Laurie Campbell has more than 20 years of experience dealing with clients and offering crucial advice to help manage their savings.

This latest rate hike, however, came as a big shock even to her.

"This one really surprised me," she said. "It’s the tenth increase in the last year and a half, and this surprised me because of the precarious situation Canadians are already finding themselves in."

Campbell says that despite the tough situation, there are some things consumers can do to help mitigate their financial risk.

"Obviously, if you can pay off more before your rate increase or before your renewal, do that with any extra money you have, put it down while you're sitting at a lower rate so that when you come up for renewal, it's not going to be so much of a sticker shock," she said.

Campbell predicts that more and more Canadians will, unfortunately, suffer insolvencies, but contacting a financial advisor or expert can make all the difference.

"Remember you still get to hold on to your RRSPs, so if your house doesn’t have a lot of equity, depending on the province you live in, you may not have to sell your house."

"Before you start selling any assets or trying to cash in your RRSPs, get the right advice, go to a licensed insolvency trustee to find out what your options are."