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Bank of Canada hikes interest rate to 3.25%, triggering higher payments for more borrowers

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The Bank of Canada on Wednesday raised trend-setting interest rates by three-quarters of a percentage point, the latest move by a central bank on a mission to curb runaway inflation.

After cutting interest rates to near zero in 2020 to stimulate the economy early in the pandemic, Canada’s central bank has aggressively lowered lending rates to cool red-hot inflation, which has risen to its highest level in decades. raised. .

Bank interest rates affect the interest rates Canadian consumers and businesses receive from banks on mortgages, lines of credit, savings accounts, and more.

At the beginning of the year the bank interest rate was 0.25%. After Wednesday’s move, he is now at 3.25%. This is the highest bank interest rate since early 2008, before the financial crisis.

Inflation in Canada eased somewhat last month from a 30-year high of 8.1%, but the bank said in its decision that most of the decline was due to gas prices, while the rest of the economy said “price We have seen further growth,” he said. Pressure, especially in service. “

Sustained underlying inflationary pressures are a big reason for the “need to raise policy rates further”, and banks “remain steadfast in their commitment to price stability and have the necessary We will continue to act,” he said. Inflation target in percent. “

The move was widely anticipated by economists who monitor banks. Banks have hiked rates five times this year, and economists expect more hikes by the end of the year.

An “aggressive” series of hikes

Jimmy Jean, vice president and chief economist at financial services conglomerate Desjardins Group, said the bank is committed to raising lending rates as long as necessary to bring inflation back below 3%. He said he made that clear.

“It’s a very aggressive tightening cycle by historical standards, but what banks are saying today is that it’s not over,” Jean said in an interview with CBC News on Wednesday. rice field.

Jean said it usually takes about two years for the full impact of a rate hike to be reflected in the economy. This means he believes high interest rates will continue through at least 2023, even if the economy pays the price of slipping into recession. .

“We already have the highest interest rates since 2007, and it would be very hard to imagine that this would not have a significant impact on consumer budgets, bankruptcies, etc.

WATCH | More Rate Hikes Expected, Economists Say:

Big BOC rate hikes aren’t over, economists say

Douglas Porter, chief economist at the Bank of Montreal, said the Bank of Canada’s “aggressive” statements sent a message that the Bank of Canada raised interest rates by 75 basis points, along with further rate hikes to keep inflation in check. There is

The move means those with variable rate loans are likely to see changes in their payments in the coming days to keep up with central bank moves. RBC and TD, two of Canada’s largest banks, raised their prime lending rates by the same amount as the central bank did on Thursday. Other companies are expected to follow suit soon.

Many mortgage holders have already seen multiple increases this year as interest rates on variable rate loans have moved from less than 2% at the beginning of the year to over 4% and even over 5% now. .

Imminent ‘trigger rate’ for many loans

However, most Canadian borrowers, who have been relatively immune to rate hikes so far, will feel the hike because of the structure of these loans.

Most variable rate mortgages allow borrowers to keep their payments fixed as interest rates change. As interest rates rise, the amount of each payment to pay back the principal decreases, more and more towards interest rates. This extends the term of the loan without increasing the size of your recurring payments.

Eventually, that spread will become so large that the loan payment will be interest only, at which point the payment terms will have to be adjusted. It’s known as the trigger rate, and “every mortgage broker and every bank in Canada…are constantly calling about it right now,” says mortgage broker Ron Butler.

Ron Butler manages Butler Mortgages in Mississauga, Ontario. (Laura McNaughton/CBC)

The exact point at which a mortgage is triggered will vary from loan to loan, but with interest rates rising so fast, many mortgages have already exceeded or will soon reach their limit.

As recently as six months ago, it wasn’t difficult to get a loan of about 1.5%, according to Butler. But he’s had five big rate hikes since March, so the current bill for the same loan he could be at 4% or more.

At that point, the original loan payment is not enough to cover the interest portion.

“Customers with variable-rate mortgages with stable payments are worried that they will eventually hit a contract trigger point and pay more,” Butler said.

“I have to get off my back.”

Debbie Henry is one of them. Henry, who lives in the Toronto area, took out a variable rate loan last November. The loan made him a fixed payment of $805 every two weeks. She hasn’t changed her payment yet, but she’s aware that the loan has a trigger her point and she’s worried she’ll be over it soon .

As it stands, she believes that the mortgage payment is practically fully applied to the interest portion, with no principal being paid at all.

“If that’s that trigger rate, I really have to sit back,” she told CBC News in an interview.

Anshu Khanna has a fixed payment on a variable rate loan on a property she owns in downtown Toronto, she said, and trigger rates have not yet been activated.

“If you keep getting to the point where you have to increase your actual monthly payments, you’re definitely going to start getting into a pinch,” she told CBC News in an interview. “We’ll see what happens.”

WATCH | Mortgage holders share their thoughts on rate hikes.

Mortgage holders nervous about rising interest rates

On the streets of Toronto on Wednesday, a number of homeowners told CBC News about their fears over the Bank of Canada’s series of rapid rate hikes this year.

It’s hard to know exactly how many people are in the same boat, but Bank of Canada data shows that about a third of Canadian mortgages are variable rate loans, and a third of those are variable rate loans. 2 is a fixed payment.

Canada’s largest lender, Royal Bank of Canada, last week estimated it had about 80,000 mortgages and will soon reach its trigger point. In a recent letter obtained by CBC News, the bank told some mortgage holders, “Our records show you may be nearing your trigger rate. Regular payments are no longer enough to cover the interest portion of the mortgage.”

“Your mortgage payments will automatically increase if this event occurs,” the letter said.

Average payments for those affected are likely to increase by about $200 a month, said Graeme Hepworth, the bank’s chief risk officer. said in a phone call with a financial analyst last month Discuss the bank’s quarterly results.

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