As of July 13th, 2022, the Bank of Canada has raised its key interest rate by 1.0%, to 2.5%. The dramatic changes are a policy effort to control soaring inflation, which sits at around 8% over the prices of living compared to the same point one year ago. The necessary policy change aims to tackle the unaffordability of life which can be seen at the pumps, in grocery and liquor stores, and just about everywhere you turn your head. For instance, the average retail price for a litre of milk in Canada during 2021 was $1.68. Just yesterday, a two-litre container of milk at whole foods costed me almost $6.00.
Financial experts estimate that the main causes of inflation are the Ukrainian war, and supply chain disruptions across all sectors. Economic sanctions, reduced trade, and decreased supply of vital resources like wheat and oil used everywhere have all contributed to a sharp increase in inflation, well beyond the scope of what financial professionals estimated at the beginning of 2022.
All in all, every Canadian can recognize that life is becoming eerily unaffordable; the threshold of income required to live comfortably is rising faster than the economy is growing.
The Bank of Canada’s decision to increase its key interest rate has resound effects on the mortgage industry. Unfortunately, this change pushes the prime rate from 3.70% to 4.70%, raising the average interest on variable rate mortgages to 3.60%. As of yesterday, the advertised rate for a 5-year variable rate mortgage at TD bank was 3.30%, today, that same product boasts a 4.45% interest rate.
Lo and behold, this grim news does not come without a silver lining. As interest rates rise, the housing market begins to cool, with the prices of homes in the GTA falling 15 to 20 percent recently. In short, the increased cost of a mortgage brought on by the increased interest rates is somewhat combatted by the lower costs of housing, and lower principal values being loaned. The current measures have provided experts with an estimation that inflation and the cost of living should return to a more normal state by the end of 2024.