The Bank of Canada’s continued rise in interest rates this year, including the one per cent surprise on Wednesday, has hit Canadians like Aashti Vijh hard.
In January, the 30-year-old marketing and communications manager paid about $ 1,600 a month for the variable-rate mortgage she has in her downtown Toronto apartment. Now, that monthly payment will be nearly $ 2,000.
“It’s been a big shock and a big change for me personally,” he told Global News on Wednesday, shortly after the central bank’s announcement, which added about $ 200 just to its payments.
“I also manage the mortgage myself, so all those payments come out of my check.”
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The key interest rate now stands at 2.5 per cent, a drastic change from the 0.25 per cent rate observed earlier this year as the Bank of Canada tries to control high inflation for decades. has caused prices to skyrocket.
The bank’s governor, Tiff Macklem, acknowledged on Wednesday that higher interest rates will add to the difficulties Canadians are already facing with high inflation, but said that if inflation tightens, it will be more painful for the economy – and for Canadians – to recover.
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This is not a comfort for Vijh. Having been forced to adjust her budget to accommodate earlier interest rate hikes earlier this year, she says she will have to find a new balance.
“Mostly, it will reduce my day-to-day costs: eating out, groceries, finding places where I can basically reduce costs. I will invest more money in my mortgage if I can, as well as with my savings,” he said.
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“I’m also reconsidering my travel plans for the rest of the year, because travel is also extremely expensive right now, and I’m not entirely sure I can adapt to that given the increased rate of travel. mortgage “.
The one percent increase on Wednesday, the largest increase since August 1998, surprised most economists who predicted a 75 basis point increase in line with the U.S. Federal Reserve.
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The increase means a typical 2.7 percent variable rate mortgage on a home with a national average price of $ 711,000 would increase monthly payments from $ 2,845 to $ 3,168, a difference of nearly $ 325 a month.
Although Vijh’s mortgage rate is slightly below 2.55 per cent, she says it is still under pressure. He also has 23 years of 25-year repayment left, which leaves him with approximately $ 384,000 to pay.
This year’s rise in interest rates has already begun to cool the Canadian real estate market, with house prices experiencing their first drop in nearly three years. Royal LePage has reduced its annual market outlook to just five per cent growth by the end of 2022, below the 15 per cent forecast earlier this year.
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But that still leaves new homeowners like Vijh making increasingly higher mortgage payments on properties that are now starting to decline in value along with the market.
Macklem said Wednesday’s oversized rate hike reflects “very unusual economic circumstances” of “too high” inflation and rising consumer anxiety, which requires drastic action to reverse.
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The Bank of Canada also noted that interest rates should continue to rise before the end of the current cycle.
In a note, CIBC senior economist Karyne Charbonneau said the Bank of Canada is now more likely to raise its key rate to a high of 3.25 per cent.
The continuous rises are worrisome for Vijh, who says she is increasingly concerned about her ability to save for retirement.
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“In January, I was probably able to dedicate a little more to my RRSP,” he said. “Today, I may have to reconsider how much I’m investing in retirement and instead put it into my mortgage payments, or save it and allocate it to an advance payment on my mortgage.”
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Vijh says he wants people of his generation who also bought into the real estate market during the pandemic to keep a close eye on their spending, especially when pointing to the potential for further interest rate hikes.
“I’m sure many of them took the opportunity, like me, to move into their first home in 2020 and 2021, and are now facing fairly sharp increases in their mortgage costs,” he said.
“It will be very important for us to re-examine how we spend and save, and get into these new changes.”
– with files from Craig Lord of Global News
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