What to know
- The Bank of Canada raised its policy interest rate by 25 basis points, marking its first increase since July 2023.
- The bank cited rising global oil prices and the risk of higher energy costs fuelling broader inflation.
- Canadians with variable-rate mortgages and other variable-rate debt could face higher borrowing costs, depending on their agreements.
- Fixed mortgage rates are not directly tied to the Bank of Canada’s policy rate and are not automatically affected by the increase.
- Mortgage experts say homebuyers should weigh their budgets, financial goals and tolerance for potential rate changes before choosing a fixed or variable mortgage.
- Further rate increases remain uncertain, as inflation and economic conditions continue to evolve.
The Bank of Canada has announced a 25 basis point interest rate hike, marking its first increase since July 2023.
The official announcement came on Wednesday, following several expert predictions that the bank would increase rates due to rising inflation, despite holding it down for several months.
Speaking with reporters on Wednesday, Bank of Canada Governor Tiff Macklem said the decision reflects economic developments observed since the last announcement in July, including the outlook for inflation and tariff negotiations.
“With the war in the Middle East resisting, global oil prices have increased and are expected to be higher for longer, this is hitting Canadians at the gas pump and increasing costs for businesses,” Macklem said.
“The growth outlook for Canada has improved modestly by continued trade actions by the United States… An increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation.”
Due to increasing oil prices, Consumer Price Index inflation has been around three per cent since April, and is expected to rise to about 3.5 per cent by the end of the year. Excluding gas, inflation remains around two per cent, according to the Bank of Canada.
Clay Jarvis, a mortgage expert at RateHub.ca, tells Now Toronto he was not surprised to hear the announcement, especially after weeks of hike predictions by financial experts in the country.
According to him, the move seems to be a preventative measure against widespread inflation and a way of acknowledging that Canada’s economic prospects might be better than previously expected.
“I thought rate hold may have been justified based on this perceived weakness in the Canadian economy. But based on Tiff Macklem’s statements… It seems the Canadian economy is actually in better shape than a lot of people realize. So, in terms of economic growth and these fears about rising inflation, a rate hike does make sense,” he said.
Despite energy costs and ongoing tariff negotiations, the Bank of Canada expects Canada’s economy to grow one per cent by the end of the year, and two per cent in 2027 and 2028.
How will this impact Canadians?
Aimee Wagner, Chief Retail Excellence Officer for Your Neighbourhood Credit Union (YNCU), tells Now Toronto the hike could mostly impact Canadians with variable-rate borrowing, including mortgages and lines of credit. Depending on their agreements, these Canadians might be facing higher payments.
“Households carrying higher levels of variable-rate debt relative to their income could face greater pressure, particularly if they’re already using credit to manage regular expenses. Higher interest charges can reduce the amount available for other financial priorities and make outstanding balances more expensive to maintain,” Wagner said in an email to Now Toronto.
While an increase in policy rates doesn’t mean groceries, gas or other everyday costs will increase, it could affect how much disposable income residents have to cover these expenses.
Those facing variable rate-debt might need to allocate more of their income into paying off debt, leaving less for other everyday expenses and savings.
How can Canadians deal with these added costs?
Those facing added interest costs could benefit from reviewing their monthly income, existing debt commitment, and everyday expenses, and creating a plan for allocating their income in the next few months, as recommended by Wagner.
“It’s also important to avoid relying on additional high-interest credit to manage existing payments without a clear repayment plan,” he added.
“With the holiday season approaching, setting a spending budget based on available income rather than available credit can also help limit additional borrowing.”
In addition to managing expenses, Canadians in need of support should check whether they are eligible for financial assistance or government benefits that could help them manage everyday costs with debt payments, without having to take money from their emergency savings.
“Financial institutions can also play an important role in helping people understand their options. Seeking advice early, particularly when managing multiple debts or preparing for a mortgage renewal, can help households make informed decisions about their finances,” Wagner said.
What does this mean for mortgage payers?
The latest announcement might have an impact on those currently paying mortgage.
Those on a variable mortgage rate can expect to see their monthly rates increase by 0.25 per cent within the next day. According to Jarvis, these rates are based on prime, and the lowest five-year mortgage rates could see an increase from 3.45 per cent to 3.70 per cent.
Although it may be difficult to manage the added cost, Jarvis said those who opt for variable rates should always be prepared to deal with hikes like this.
“I would like to think that anybody who takes out a variable rate mortgage has already thought through potential increases. So, if you are not on a fixed payment variable, then you can expect your payments to increase, and you’re going to have to somehow make the numbers in your household work to absorb that,” he said.
On the other hand, those paying fixed rates should not worry, as their rates are not directly affected by the Bank of Canada announcement. The best five-year rate for these buyers remains at 4.34 per cent.
“Fixed rates do not have the same relationship to Bank of Canada interest rate decisions. So, if people are worried that they’re going to see fixed rates increase by 25 basis points between today and tomorrow, that’s just not the case,” Jarvis said.
What does this mean for homebuyers?
The Bank of Canada announcement is also expected to impact the decision of those who are now looking to buy a home, especially when choosing what kind of mortgage they will be taking on.
According to Jarvis, this decision always varies from buyer to buyer, and there isn’t a hard line on which is more beneficial, even with the latest announcement.
In general, fixed rates are recommended to those who need predictability over the course of their mortgage terms, and variable for those equipped to deal with budget flexibility and possible increases.
“You always want to run these scenarios with a trusted mortgage broker who can help clarify your thinking for you,” he said.
When it comes to affordability, Jarvis said he doesn’t expect increasing rates to make a significant impact on Canadians’ ability to buy. On the other hand, it might keep buyers from jumping in.
“When you hear higher rates, it might spook some people into staying on the sidelines to see if they come back down. But that’s not really what we’re anticipating.”
Is now a good time to buy?
When it comes to buying a home, the latest announcement might also help buyers decide on whether this might be the best time for the investment.
As explained by Jarvis, whether this is the ideal time to purchase depends on each homebuyer and their objectives.
Those who want to own their home for the security of having their own space might still benefit from taking in ownership at this time, despite the increase.
“If you want the security of owning your own home and controlling your own space, it’s never a bad time to buy a home,” Jarvis explained.
However, those who want to make an investment to build equity might benefit from taking a step back.
“If you’re going out to buy a home because you think you’re going to turn it into some sort of cash-flowing investment or flip it for a massive profit, this might not be the market for you,” he said.
Will rates go down again anytime soon?
Since interest rates and inflation are highly dependent on tariff negotiations and conflicts in the Middle East, Jarvis said it’s hard to predict whether we will see another hike from the Bank of Canada or not.
On the other hand, the expert said it seems the bank might be anticipating another inflation increase, as it expects it to raise to 3.5 per cent.
“Then I would expect the Bank of Canada to increase the overnight rate again, which will add another at least 25 basis points to variable mortgage rates. So I don’t think we’re out of the woods yet,” he said.
