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How Rising Interest Rates Can Affect Buyers
The Bank of Canada has been raising its key interest rate aggressively to combat the high inflationary pressures by resetting the supply-demand dynamic in the marketplace. However, higher Bank of Canada interest rates almost immediately impact the housing market through higher monthly mortgage payments.
As the five-year fixed mortgage period ends for consumers in Canada, households will have to start higher monthly payments. Using data from the Bank of Canada and Statistics Canada, we can do a rough calculation of how much monthly mortgage payments would increase for the average household. Monthly payments will rise by about $315 on average for every 1% point increase in rates. With many market participants forecasting a 3% Bank of Canada interest rate in January of 2023, that is roughly a $900 increase in the average household mortgage payment.
Although only 10% of households are forecast to hit the five-year mark in their mortgages this year, this can significantly impact economic growth, as consumers have less money to spend on goods and services. We expect discretionary spending in Canada to soften this year, while the impact of higher rates will be felt more significantly in 2023 and over the next several years.
