The Greenhouse
by Pine

The Bank of Canada just raised interest rates

Rising interest rates present both challenges and opportunities. Strategic financial planning becomes crucial in times like these.

How the recent interest rate increase could affect your mortgage

As we navigate through this complex financial landscape, it's essential to keep our finger on the pulse of any changes that could impact us. One such change happened this week when the Bank of Canada made the significant decision to increase its target for the overnight rate to 5%. This means they have raised the primary interest rate in Canada. Alongside this, the Bank is continuing its policy of what's known as 'quantitative tightening'.

You might be wondering what these decisions mean and why they matter to you. To put it simply, these changes can directly influence the costs of borrowing, including the interest you pay on your mortgage. In the following sections, we'll delve deeper into why the Bank of Canada decided to make these changes, and crucially, what it means for you as a homeowner or potential homebuyer. We'll also share some strategies that Pine has developed to help you successfully navigate this new financial landscape. So, let's get started!

The driving factors behind the Bank of Canada's decision

To better understand the impact of these changes on your mortgage, it helps to know why the Bank of Canada made these decisions. These changes are a response to several factors currently shaping the global and Canadian economies.

Firstly, there's the issue of global inflation. Although it's been easing, thanks in part to lower energy prices and a decline in goods price inflation, we're still seeing some persistent inflationary pressures. This is especially the case in services due to robust demand and tight labour markets.

The Canadian economy has also been performing stronger than expected, showing more momentum in demand. Consumption growth was surprisingly strong, coming in at a robust 5.8% in the first quarter of the year. While it's expected that consumer spending will slow down in response to the increased interest rates, recent data suggest that there is a more persistent excess demand in the economy.

Finally, the housing market has seen a bit of a surge. New construction and real estate listings are lagging behind the demand, which is contributing to a rise in prices.

In the face of these factors, the Bank of Canada decided to increase the policy interest rate to 5% and continue with its quantitative tightening to help restore price stability and control inflation. But what does all this mean for your mortgage? Let's explore that in the next section.

How rising interest rates impact your mortgage

An increase in interest rates can mean different things for different people. If you're a current homeowner with a fixed-rate mortgage, your monthly payments won't change until your mortgage term ends and it's time to renew. However, if you have an adjustable-rate mortgage, your monthly payments will increase.

Imagine a homeowner, let's call her Jane, with an adjustable-rate mortgage. Jane's monthly payments may increase if her mortgage contract states that her payments will go up with rising interest rates. On the other hand, if her mortgage is a variable-rate fixed payment contract, since her payment is not covering all the mortgage interest with the higher interest rate, the amortization of Jane's mortgage will increase. This means that Jane will be paying her mortgage for a longer period of time unless she pays this accrued interest down when her mortgage term is up for renewal. 

For potential homeowners, or those looking for a mortgage renewal, higher interest rates mean borrowing money becomes more expensive. Let's take John, who is a prospective first-time home buyer. If the interest rates rise and continue to stay higher in the future, the amount of interest that John will have to repay over the lifetime of his mortgage should also increase. This means John may have to rethink the price range of homes he can afford or consider other financing options.

While an increase in interest rates can seem like a daunting change, it's important to remember that these changes often come gradually. Plus, there are strategies you can use to minimise the impact, which we will explore in the next section.

Navigating the rising interest rates with Pine

In the face of rising interest rates, having a plan and making informed decisions is key. At Pine, we're dedicated to helping you understand and navigate these changes.

One strategy for existing homeowners with variable-rate mortgages might be to consider switching to a fixed-rate mortgage. Fixed rates can provide certainty about what your future payments will be, which could be particularly valuable in a rising rate environment.

For those considering buying a home, it may be worth looking at your budget and expectations again. The increased cost of borrowing might mean adjusting the price of the house you're looking for or considering saving a larger down payment to offset the higher interest costs.

The silver lining of higher interest rates is that they're often associated with a strong economy, which could mean higher wages or better job security. In addition, higher rates could cool down the housing market, potentially bringing house prices down in the future.

Remember, every person's situation is unique, and it's essential to seek personalised advice. At Pine, we're committed to providing you with the necessary support and guidance to make informed decisions about your mortgage. Whether you're an existing homeowner or a potential homebuyer, we're here to help you navigate through this new financial landscape.

Navigating your next steps

As we wrap up this discussion, remember that changes in the financial landscape like rising interest rates present both challenges and opportunities. Strategic financial planning becomes crucial in times like these.

Switching from a variable to a fixed-rate mortgage, adjusting your home buying budget, or seeking updated, easy-to-understand financial information are all viable ways to navigate these changes. Remember, interest rates are just one piece of the broader economic picture. Personal financial circumstances, housing market conditions, and your future plans are also significant.

At Pine, our mission remains constant regardless of economic fluctuations: to guide and support you in your mortgage journey. We'll continue to keep you updated on any further developments and what they could mean for you. As always, please don't hesitate to contact us if you have any questions or would like to discuss your mortgage options. We're always here to help!

Question? We've got answers.

What’s involved in getting a mortgage from Pine?

Does Pine charge any lender fees?

Will I have a point of contact at Pine?

Is my data secure with Pine?

How much of a down payment does Pine require?