Today, the Bank of Canada (BoC) made a significant decision to increase the target for the overnight rate by 0.25%. According to the BoC's statement, the overnight rate target has been raised to 4¾%. The decision reflects the bank's belief that the previous monetary policy stance was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the 2% target. They do, however, expect inflation to return to the 2% next year. The increase of today is only to ensure that we will not be stuck at inflation above the 3% mark for an extended period of time.
In Canada, the economy performed better than anticipated in the first quarter of 2023, with GDP growth reaching 3.1% and inflation increased last month to 4.4%. This was the first increase in 10 months. On the point of view of the economy, there is plenty of jobs that are open and few applicants to take them. This is putting pressure on the wages and is allowing people to have cash to spend, putting pressure on corporations to provide goods and services exceeding what they can provide. It will take some time to see the balance returning between consumption and production. Interest rate increase takes from 3-6 months to see their full effect. Hopefully, we can see inflation returning on its downward trend soon and avoid any further rate increase.
The BoC's decision to increase the overnight rate has immediate consequences for mortgage borrowers with a variable rate with payments that varies with the change of interest rates. So, if this is your case you will have your payment increasing by 15$ per $100,000 of mortgage that you have. So for a $500,000 mortgage, you will see $75 increase per month. If you have a variable rate mortgage with constant payment, your payment will not move, but you will be more likely to be paying less than the interest on your mortgage. This means that from now on, your mortgage will grow instead of decreasing. There is a limit to that increase, call the trigger point:
I do recommend that you call me, 604-828-9864 to discuss what to do next. If you have a fixed rate, there is no change for you until renewal. If your renewal is in the next 6 months, I will be contacting you. If you have a preapproval, all of them are on a fixed rate so, there is no change in your purchase capacity.
What does this mean for the real estate market? Prices should remain mostly the same because fixed rates are still in the same range that they have been all year. There is no reason for the price to decline, especially that there is a very limited inventory. What will most likely change is the number of transactions which should be declining. This may allow for a rebalancing of the market and make it easier for buyers to purchase a property. This is hoping that sellers will not walk away from the market all together. So, if you were planning on making a purchase this year. I would get pre-approved now, to lock in today's rates and to start your search on a market that will likely see less competitions. This should look more like the market of February and March than the Mai market, which saw bidding war and multiple offers occur regularly.
If you need to contact me do not hesitate to call me at 604-828-9864 or to make an appointment with the link below.
Have a great day.
Sincerely,
Simon Bilodeau
Mortgage Broker
DLC-Mortgage Negotiators
604-828-9864
simon@refinancebc.ca
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