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Are higher interest rates coming?
Higher interest rates could have serious implications for homeowners. The Bank of Canada (BoC) is now faced with the decision between letting the economy recover further or hiking interest rates.
Since March 2020, the BoC has left its key interest rate at 0.25%.
With borrowing costs so low many Canadians used this as a perfect time to upgrade their homes or do renovations. Due to high housing prices some homeowners also took the chance to borrow against the equity on their properties. This brings mortgage and HELOC debt up to $1.96 trillion (Global News).
“That’s the number one issue facing the Canadian economy: increased sensitivity to higher interest rates” (Benjamin Tal -deputy chief economist at CIBC).
He warns that even a slight increase in interest rates could deal a substantial blow to households.
What will the Central Bank do?
As the latest economic figures show larger than-expected increases in inflation, the pressure is now on the central bank to raise interest rates. Policy makers have some leeway for now since those inflation figures are coming off historic lows set in the spring of 2020.
However, the normal intervention would be to increase interest rates, which would cool down the overheating economy and housing market.
“To the extent that inflation starts rising and the Bank of Canada is behind the curve and not dealing with it quickly enough, the speed at which interest rates would have to rise might go up. And that’s something that can have a significant negative impact on housing” (Benjamin Tal -deputy chief economist at CIBC).
What does this mean for homeowners?
Higher borrowing costs might dissuade future homebuyers from purchasing, which in the short term would likely have a calming effect on the housing demand. However, higher interest costs could deal a blow to Canadian homeowners who might already be cash-poor even if the high property prices make them house-rich (Diana Petramala – senior economist at Ryerson University’s Centre for Urban Research and Land Development).
“If interest costs were to go up one to two percentage points, because of the level of debt, households could be put in a position where they’re devoting a significant share of their income to making their mortgage payments” (Diana Petramala – senior economist at Ryerson University’s Centre for Urban Research and Land Development).
Original Article – Wealth Professional