In January, the 30-year-old marketing and communications manager was paying about $1,600 a month on the variable-rate mortgage she has on her downtown Toronto apartment. Now, that monthly payment will be almost $2,000. “It was a big shock and a big change for me personally,” he told Global News Wednesday, shortly after the announcement by the central bank, which added about $200 to its payments alone. “I also manage the mortgage myself, so all of these payments come out of my paycheck.”
Read more: Bank of Canada raises key rate by full percentage point in surprise move
Story continues below ad The key rate now stands at 2.5%, a sharp shift from the 0.25% rate seen at the start of the year, as the Bank of Canada tries to tame decades of high inflation that has sent prices skyrocketing. Bank Governor Tiff Macklem acknowledged Wednesday that higher interest rates will add to the hardships Canadians are already facing with high inflation, but said that if inflation takes hold, it will be more painful for the economy – and for Canadians – to restore. 1:18 Bank of Canada raises key rate by full percentage point in surprise move Bank of Canada raises key rate by full percentage point in surprise move This is so little comfort to Vijh. After being forced to adjust its budget to cover previous rate hikes earlier this year, it says it will once again have to strike a new balance. “Mostly I’m going to reduce my day-to-day expenses – eating out, groceries – finding places where I can actually cut costs. I will put more money towards my mortgage if I can, as well as through my savings,” he said. Story continues below ad “I’m also rethinking my travel plans for the rest of the year because travel is also extremely expensive at the moment and I’m not entirely sure I can afford it given the rise in mortgage rates.” Wednesday’s 1 percent increase – the largest single increase since August 1998 – surprised most economists who had expected a 75 basis point increase according to the Federal Reserve. Trending Stories
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The increase means a typical 2.7 percent variable rate mortgage on a home with a national average of $711,000 would see monthly payments rise from $2,845 to $3,168 — a difference of nearly $325 a month. Although Vijh’s mortgage rate is slightly lower at 2.55%, she says she is still feeling the squeeze. She also has 23 years left on her 25-year amortization, leaving her with about $384,000 to pay back. Rising interest rates this year have already started to cool Canada’s red-hot housing market, with home prices seeing their first drop in nearly three years. Royal LePage cut its annual market outlook to just 5 percent growth through the end of 2022, down from a forecast of 15 percent earlier this year. Story continues below ad But that still leaves new homeowners like Vijh making ever-higher mortgage payments on properties that are now starting to drop in value along with the market. Macklem said Wednesday’s outsized rate hike reflected “very unusual economic conditions” of “very high” inflation and heightened consumer anxiety, which required drastic action to reverse. 1:38 Bank of Canada plans ‘soft landing’ approach to tackle inflation Bank of Canada plans ‘soft landing’ approach to tackle inflation The Bank of Canada also indicated that interest rates should continue to rise before the end of the current cycle. In a note, CIBC senior economist Karyne Charbonneau said an increase in the Bank of Canada’s key interest rate to a maximum of 3.25% is now more likely. The ongoing hikes concern Vijh, who says she is increasingly worried about her ability to save for retirement. Story continues below ad “In January, I was able to put a little more into my RRSP,” he said. “Today, I might have to re-evaluate how much money I’m paying into my retirement and instead put it towards my mortgage payments or save it and put it towards a down payment on my mortgage.”
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Vijh says she wants people of her generation who also bought into the property market during the pandemic to keep a close eye on their spending, especially as the possibility of more rate hikes looms. “I’m sure a lot of them jumped at the opportunity, like I did, to get into their first home in 2020, 2021, and now they’re facing pretty steep increases in the cost of their mortgages,” she said. “It will be very important for us to rethink the way we spend and save and get into these new changes.” – with files from Craig Lord of Global News 0:56 Mortgage advice after Bank of Canada’s 1% rate hike Mortgage advice after Bank of Canada’s 1% rate hike © 2022 Global News, a division of Corus Entertainment Inc.
