Varun Kohli December 8, 2022 No Comments

In October we published an infographic outlining exactly how the Bank Of Canada’s rate increases were impacting Canadians with variable mortgages. With the recent news from the Bank Of Canada hiking rates another 0.5% (50 BPS) these impacts are even greater.

In late October of last year, mortgage interest rates were in the low to mid 2% range. Based on a $800,000 mortgage, an amount not foreign to many people given how high house prices were, a 2.05% mortgage would cost homeowners just over $3,400 a month. Let’s say that a couple of two professionals in their late 20s, making $80,000 each in Toronto, took advantage of low rates in October 2021 and just bought a townhouse in Toronto and held an $800,000.00 mortgage. Their combined take home pay would hover in and around $9,000 a month. After utilities, insurance, property taxes, and basic bills, their household spending would eat up a little over half of their budget. If that couple were in a variable mortgage today, they would be paying $5,142,00 for the same mortgage amount or paying $1735.00 extra a month from when they first purchased in October 2021.  

Very few people will be able to stomach those price increases. Our housing market has been put in a position where monthly mortgage payment costs have increased by 51%, forcing that young couple in our example above to come up with an extra $20,820 a year AFTER taxes just to maintain their financial budgets and mortgage payments. This is a recipe for pain. It also explains why predictions of a recession are increasing.

What does this all mean? Homeowners will have a lot less cash for spending, investing, and saving. The good news is that Canadians are prudent and smart with their money (generally). At the end of the day, rates were never going to stay ultra-low forever. But there’s a big difference in a graduated rate increase cycle, and one where the central bank hikes rates 7 times in 11 months. The big lesson in all of this is that central bankers are not infallible, that they’re human and make mistakes too, and that the job of dealing with and forecasting economic changes is very, very hard. Unfortunately, Canadians with Variable mortgages are going to continue to feel the impact and struggle with producing the funds needed to cover their increase in mortgage payments.

If this is your situation, call Tembo Financial to see how we can help!

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