The Bank of Canada’s continued interest rate hikes this year – including Wednesday’s surprise one per cent increase – have hit Canadians like Aashti Veech hard.
In January, the 30-year-old marketing and communications manager was paying about $1,600 a month on the variable-rate mortgage he has on his downtown Toronto apartment. Now that monthly payment will be close to $2,000.
“It was a big shock and a big change for me personally,” she told Global News on Wednesday, shortly after the central bank’s announcement, which added about $200 to her payments alone.
“I’m also managing the mortgage myself, so all these payments are coming out of my salary.”
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The key rate is now 2.5 percent, a drastic change from the 0.25 percent rate seen at the start of the year as Canada’s central bank tries to tame decades-high inflation that has sent prices skyrocketing.
Bank Governor Tiff Macklem acknowledged Wednesday that higher interest rates will add to the hardships Canadians already face due to high inflation, but said if inflation takes hold, it will be more painful for the economy — and for Canadians – to bring it back down.
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This comes as little consolation to Vijh. After being forced to adjust her budget to accommodate previous interest rate hikes earlier this year, she says she will once again have to find a new balance.
“Basically it’s going to be reducing my day-to-day expenses — eating out, groceries — finding places where I can basically cut costs. If I can, I will put more money into my mortgage as well as through my savings,” she said.
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“I’m also rethinking my travel plans for the rest of the year as travel is also extremely expensive at the moment and I’m not entirely sure I can accommodate that given the rise in mortgage rates.”
Wednesday’s one percent increase – the biggest single increase since August 1998 – surprised most economists who had expected a 75 basis point increase in line with the US Federal Reserve.
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The increase means a typical 2.7 percent variable rate mortgage on a home with a national median price of $711,000 will increase monthly payments from $2,845 to $3,168 — a difference of nearly $325 per month.
Although Vijh’s mortgage rate is slightly lower than 2.55 percent, she says she still feels the strain. She also has 23 years left on her 25-year amortization, leaving her with roughly $384,000 to pay off.
Rising interest rates this year have already started to cool Canada’s red-hot housing market, with home prices posting their first decline in nearly three years. Royal LePage cut its annual market outlook to just five percent growth through the end of 2022, down from the 15 percent forecast earlier this year.
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But that still leaves new homeowners like Vijh making ever-higher mortgage payments on properties whose value is now starting to decline along with the market.
Macklem said Wednesday’s excessive rate hike reflected “very unusual economic circumstances” of “too high” inflation and heightened consumer anxiety that required drastic action to reverse.
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The Bank of Canada has also signaled that interest rates will need to continue to rise before the end of the current cycle.
In a note, CIBC senior economist Karin Charbonneau said the Bank of Canada is more likely to raise its key interest rate to a peak of 3.25 per cent.
The continued hikes are a concern for Vijh, who says she’s increasingly worried about her ability to save for retirement.
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“In January, I was probably able to put a little more toward my RRSP,” she said. “Today, I may have to reconsider how much I’m putting toward retirement and put it toward my mortgage payments instead, or save it and put it towards prepaying my mortgage.”
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Weech says she wants people of her generation, who also bought into the housing market during the pandemic, to keep a close eye on their spending, especially as the potential for more interest rate hikes looms.
“I’m sure a lot of them took the opportunity, like me, to get into their first home in 2020, 2021 and now they’re facing a pretty steep increase in their mortgage costs,” she said.
“It will be very important for us to rethink how we spend and save and get into these new changes.”
– with files from Craig Lord of Global News
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