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(July 13, 2023)

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Yesterday, the Bank of Canada raised the overnight rate to a 22-year high of 5% which translates to a consumer prime rate of 7.20%. Additionally, they revised their forecast for inflation to hit the 2% target by mid-2025 (6 months later than before), signaling that interest rates will remain higher for an extended period. While this news may come as a disappointment, the economy is still experiencing excess demand, and growth is expected to continue supported by various factors. However, the housing market presents challenges, with rising prices and limited supply.

Impact on Inflation and Housing Market: The unexpected surge in housing resales, coupled with a shortage of supply, has driven house prices higher than initially anticipated by the Bank of Canada in January. As a result, inflation could potentially increase by approximately 0.3% by the end of 2023 compared to an earlier outlook in January. This situation is further compounded by the lack of new housing starts in the current economic conditions, despite a substantial increase in population (addition of 1.2 immigrants).

What should I do?

Given the current circumstances, it’s crucial to approach your next mortgage decision with caution and consider various factors. Here are some tips to navigate the mortgage landscape:
-Explore all available mortgage terms ranging from 1 to 10 years.
-Consider popular terms such as 2-4 year fixed rates.
-Be aware of amortization options to potentially ease the payment shock when transitioning to higher interest rates.

The three tiers of lending

TIER 1-> Toughest qualification guidelines -> 5.15% to 6.49% -> up to 30 years amortization -> 1-10 year terms

TIER 2-> Loosened qualification guidelines -> 5.99% to 7.99% -> up to 35 years amortization -> 1-5 year terms

TIER 3-> minimal qualification criteria -> 10.95% to 14.95% -> interest only payments -> 1 year renewable terms

What happens next?

With the Bank of Canada’s announcement in the rearview mirror, attention now turns to the bond markets, which influence fixed mortgage rates. Following yesterday’s announcement, bond market rates have experienced a slight decrease but only after a steep 30 basis point increase since June 30. It will be interesting to see how the bond markets react going forward. Fixed mortgage rates correlate directly with bond yields, if they increase, so do fixed rates (and vice versa).

Conclusion

The Bank of Canada’s rate hike and revised inflation forecast have implications for borrowers and the housing market. Being proactive in mortgage selection, considering alternative lending options, and staying updated on market trends will empower individuals to make informed decisions. As the situation evolves, it’s essential to remain vigilant and adapt strategies accordingly.

Wondering what to do next? Call or text Marko Gelo right now at 604-800-9593, or Click Here to schedule a free, no-obligation phone call with Marko.

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