Stephen Poloz

Debtors Face Higher Interest Payments Following Bank of Canada Rate Hike

Steve Saretsky -

The Bank of Canada hiked interest rates again today. Bank of Canada governor Stephen Poloz raised rates by another 25 basis points, it was the third time in the past six months. Rates have more than doubled in that time, going from 0.50 to 1.25.

Bank of Canada interest rate
Bank of Canada Historical Interest Rates.

This is critically important considering the context of the current situation. Interest rates have been at historically low, emergency levels since the financial crisis. This has allowed households to absorb elevated house prices and a record amount of debt. Each rate hike reduces the ability to service that debt. A 1% rate increase to Vancouver mortgages would require an additional 9% of income.

Canada mortgage servicing
Source: Better Dwelling

Following the Bank of Canada announcement the big Canadian banks all hiked their prime lending rate by 25 basis points. The prime lending rate is the annual interest rate Canada’s major banks use to set interest rates on variable loans, lines of credit, variable-rate mortgages, and HELOCs (Home Equity Lines of credit).

In summary, every borrower carrying a line of credit, variable rate mortgage, or HELOC will be saddled with higher interest payments.

This will put pressure on the HELOC phenomenon, which has seen balances increase by 500% since the year 2000 to a total of $211B and variable rate mortgages which make up 29% of Canadian mortgages per RateHub.

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The Canadian Economy

Steve Saretsky -

Happy Monday Morning! We got a string of new data this past week confirming inflation in consumer goods, and housing are proving to be more than transitory. Canada’s consumer price index continued to drift higher with prices hitting an 18 year high, up 4.7% from last October. The recent floods in BC...

Steve Saretsky -

The calls for impending interest rate hikes continues. CIBC’s chief economist, Benjamin Tal, was out recently suggesting the Bank of Canada could hike its benchmark interest rate at least six times beginning in early 2022. “I think there is a risk of getting into the market at today’s rates,” noted Tal....

Steve Saretsky -

The BC Government announced it is looking at several cooling measures for the housing market in 2022. They have highlighted two measures. The first is an end to the blind bidding process, and the other is a mandatory “cooling off period” which will allow any buyer a 7 day recession...

Steve Saretsky -

The Bank of Canada continues to slowly drain liquidity after flooding the system with a firehose of cash during the pandemic. Bank of Canada governor Tiff Macklem announced the end of Canada’s QE program (also known as money printing). Furthermore, in Macklems words, “We expect to begin increasing our policy...

Steve Saretsky -

Consumer price inflation ripped higher in September, surging 4.4% year-over-year, the fastest pace of price increases in 18 years. Let’s discuss this further. We have an inflation problem and the Bank of Canada remains of the view that inflation will be transitory. Although they really can’t say otherwise, for if...

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The Saretsky Report. December 2022