January 26, 2023

The Bank of Canada recently raised its interest rate from 4.25% to 4.5%. This is the fifth consecutive rate hike and has big implications for Canadians who have variable-rate mortgages.

Understanding how an interest rate hike affects your mortgage is key to managing your finances responsibly and making sure you don’t get overwhelmed with payments. Let’s break down what you need to know.

How are Mortgage Rates Calculated?

Mortgage rates generally move in conjunction with the Bank of Canada’s overnight lending rate, which is determined by the Bank of Canada’s target rate and adjusted based on economic conditions. When the Bank raises or lowers its target rate, lenders adjust their prime rates accordingly (lenders can choose whether or not to pass on the full cost of the change to customers). This, in turn, affects variable mortgage rates across all lenders and products.

Varying Impact Depending on Your Mortgage Product

The effect of the interest rate hike will depend on the type of mortgage product you have. Fixed-rate mortgages remain unchanged—they are locked in at their current interest rate until maturity—so these borrowers won’t see any change due to this hike. However, those with variable-rate mortgages will be impacted. The new higher prime rate means that monthly payments will go up as well as your total cost over the life of your loan. It is important to note that this increase may be gradual if your lender has chosen not to pass on the full impact of the interest rate hike right away.

How You Can Prepare for Higher Payments

It is always a good idea to plan ahead when it comes to managing your finances and make sure that you can afford any additional costs associated with higher payments before they take effect. One way you can do this is by speaking with a financial advisor about budgeting options that would work best for you and help you manage any changes in payment size more effectively.

Additionally, if you are looking for ways to save money on your mortgage payments, there are many innovative products available through our associated lenders that allow for flexible payment structures, such as biweekly payments or lump-sum prepayments without penalty fees.

Conclusion:

The recent increase in interest rates by the Bank of Canada has varying impacts depending on what type of mortgage product you have – fixed-rate mortgages remain unchanged while those with variable-rate mortgages may see their monthly payments go up due to higher prime rates set by lenders.

It is important to plan ahead and consider budgeting options that could help manage any changes in payment size more effectively so that homeowners aren’t caught off guard when they receive their statements each month or year. By understanding how an interest rate hike affects your mortgage, you can make informed decisions about how best to manage your finances responsibly!

When it comes to managing your finances and understanding how interest rate hikes affect your mortgage, 8Twelve Mortgage Solutions can provide you with the advice and guidance you need. With years of experience in the mortgage industry, their team of knowledgeable agents will be able to answer all your questions about the Bank of Canada’s recent rate hike and provide sound financial advice.