Not many in the financial community expected the Bank of Canada’s 100 basis point overnight prime rate increase, including a panel of 17 of Canada’s top economists assembled by Finder.com..All panel members predicted an increase, with three-quarters them expecting a .75% rise. None expected 1%. Most – 69% - agreed with the bank’s aggressive move..Three more bank announcements are scheduled for 2022, with 75% of panelists expecting at least two more increases..Doug Porter, chief economist at BMO Financial Group, agrees with the Bank's aggressive push to raise rates.."Inflation has come in even hotter than the bank expected (7.6% in May) and surveys suggest there is a mounting risk inflation is becoming entrenched, suggesting the bank will need to become even more aggressive.”.Tony Stillo, director of Canada economics at Oxford Economics, believes the bank wants its rate at 3% by October.."This would reach the top of the Bank's 2 to 3% range for the neutral rate but be above our 2% estimate,” said Stillo. “In our view, this would bring rates well into restrictive territory. We then expect the Bank will reduce the policy rate to its neutral level of 2% in Q2 of 2023, once it has sufficient evidence that inflation and the broader economy are slowing.".Some panelists are urging the bank to carefully consider aggressive raises, most citing inflation and the prospect of recession as main causes for concern..It’s a fine balance, said Murshed Chowdhury, associate professor, University of New Brunswick.."The level of inflation is indeed way too high, which warrants active monetary policy,” said Chowdhury. “However, the Bank needs to be cautious regarding raising rates as the impacts are heterogeneous on households' income, debt and wealth.".The increase will have a big effect on mortgage holders and potential new buyers, said James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender..“Canadians should expect the prime lending rate at all financial institutions to increase by the same 100 basis points,” said Laird. “This means anyone with a variable-rate mortgage or home equity line of credit will see their rate rise accordingly. This group should calculate what their new payment will be with this rate hike and also budget for further hikes this year.”.As an example, using RateHub.ca’s mortgage payment calculator, a homeowner who put a 10% down payment on a $711,000 home with a five-year variable rate of 2.5%, amortized over 25 years (total mortgage amount of $659,737) has a monthly mortgage payment of $2,955..With the bank’s increase the homeowner’s variable mortgage rate will increase to 3.5% and their monthly payment will increase to $3,294, a difference of $339 more per month or $4,068 per year on the mortgage payments..Mortgage holders with a fixed-rate mortgage are unaffected until their next renewal date..“If that renewal date is coming up soon, they should start to calculate their payments based on the rates available today,” said Laird. The hike will challenge some to qualify for a mortgage..“It means anyone getting a new mortgage, whether it is variable or fixed, will be stress tested at two percentage points higher than their contract rate,” said Laird. “For most fixed-rate borrowers, this will put their stress test at around 7% and for most variable-rate borrowers, it will put their stress test at around 6%.”.According to Laird, buyers will qualify for more by choosing a variable rate over a fixed rate..Both homeowners and investors should look at the long-term when it comes to buying, selling, and adjusting their portfolios, said Elke Rubach, president of Toronto-based Rubach Wealth..“This rate increase will not impact homeowners in the short-term as long as their refinancing of homes is not coming up soon. They will be affected if it’s coming up soon as they will need to refinance at a higher rate,” said Rubach. “As far as investors are concerned, trying to time the market is a terrible idea and if they are in the right asset mix that matches their risk tolerance, they should know that eventually, the markets will correct. If they liquidate now, it will secure the loss.”.Rubach advises the importance of having for a clear budget and financial plan in place..“Run different models with different interest rates to understand where they stand financially and how soon they will be in trouble,” said Rubach. “If they don’t know how to do it themselves, they should work with a financial advisor who will help them out. In some cases, it might be worth refinancing now before rates go up again in the fall.”.“The worst thing anyone can do is navigate through these uncertain times and not get in front of the problem."
