July 27, 2022

Everything You Need to Know About Interest Rates in Canada

'mortgage' spelled with house in background, with percentage signs

Unsurprisingly, homeowners are more than a little bit interested in how interest rates are changing. As the rate at which they borrow against rises, so does the cost of a home.

Imagine finalizing the budget for one arrangement, only to have this change over the years. To be sure, buyers should have considered that interest rates could climb throughout the mortgage’s lifetime. But life isn’t always like that.

Various pressures affect the decision to buy a home. People have time-sensitive reasons for buying a home. Perhaps the largest home in their budget suddenly came available. Maybe after losing so many bidding wars, buyers are eager to just claim a home they can call their own.

For years, the interest rate stayed very low, and borrowing money from the bank was about as cheap as it could get. Let’s look at how things are changing and what that means for Canadians.

Brink of Selling

According to a recent survey of Canadians conducted by the Manulife Bank of Canada, nearly one in four say they will have to sell their home if interest rates rise further. More than one in five Canadians anticipate that climbing interest rates will have a “significant negative impact” on their overall mortgage, debt and financial situation.

More than half of those surveyed said they feel unprepared for rising rates. The survey was conducted between April 14 and April 20, 2022. On June 1, the central bank increased its key interest rate by half a percentage point, from 1% to 1.5%.

In addition, the deputy governor of the Bank of Canada said it might rise again, from 1.5% to 3%. In other words, the rate at which homeowners borrow against may triple in a short time.

Meanwhile, the annual pace of inflation rose this April to 6.8%, the faster annual rise in just over 30 years. Even if interest rates remained in place, other costs of living threaten to make home costs less affordable.

In May 2022, inflation in Canada rose even higher, from 6.8% to 7.7%, exceeding expert forecasts. While surveys asking Canadians their opinions are not necessarily scientifically accurate, the broad trends here are undeniable.

Ontario is Still Expensive

Canadian housing and life, in general, are getting more expensive quickly, especially in Ontario. Indeed, Ontario has the dubious distinction of being home to three of the five most expensive cities to live in in the US or Canada. Hamilton, Mississauga, and Toronto join New York City and Vancouver as the most unaffordable cities in either country, according to the Canadian insurance provider Policy Advisor.

Ontario homeowners need to understand the different ways they can offset climbing interest rates and inflation by leveraging the equity they’ve built up over the years. There are different routes to take. Which is right for you depends on your life goals and financial circumstances.

Speak to an award winning broker at Burke Financial for personalized advice, or read on for some general tips.

Second Mortgages

Ontario homeowners looking to improve their financial standing as interest rates rise may want to consider a second mortgage. Leading mortgage brokers can help you find the right second mortgage lender here to help you avoid bad credit and save $1,000 each month.

Whatever your debt or credit level, Burke Financial can help you. You’d probably be surprised by how much cash you can access by tapping into the equity you’ve built up over the years!

People commonly use a second mortgage to free up cash when it’s time to pay for a big renovation or seize an investment opportunity. The competitive rates you get may help you mitigate the difficulties increasing interest rates present.

Pay back unwieldy, larger debts with one that has lower interest rates. This is probably the best way to use Ontario second mortgage loans. If you describe your specific circumstances to a Burke Financial broker, we can help you navigate your second mortgage or recommend an even better way forward.

Home Equity Loan or Home Equity Line of Credit (HELOC)

Amid rising interest rates, Canadians borrowed an additional $2 billion on home equity lines of credit (HELOC) in February 2022, representing the highest one-month increase in ten years. Let’s explain a little more about these two methods of borrowing against your home’s value.

HELOC lets homeowners take out a line of credit based on the difference between their home’s current market value and the amount left on their mortgage. Usually, it entails up to 80% of their property’s value. Borrowers only pay back the money on what they borrow when they borrow it.

In contrast, a home equity loan is a lump sump borrowers can access and pay fixed rates on. Like HELOC, the amount they can borrow is tied to their home’s equity.

HELOCs let homeowners access their equity flexibly and on-demand without applying and reapplying for separate financing each time they need a boost.

woman sitting on bed, calculating rates and variables on a computer

However, it’s also a revolving form of credit, meaning there’s a risk that you can lose your home if you don’t pay it off. Plus, HELOCs are usually subject to variable interest rates, meaning they’re subject to market fluctuation — when the bank increases its interest rate, HELOCs get more expensive, too.

Complicating things further is that home prices have almost certainly outpaced rising interest rates, meaning that overall, homeowners have more equity than they’d have if both rates stayed put. Using a HELOC to renovate your home could potentially increase its value more.

Even if interest rates made HELOCs more expensive, they might still benefit you. If you’re curious about home equity loans in Toronto or anywhere in Ontario, speak to us. We’ll let you know if this path makes the most sense.

There are things to consider when you’re buying a home and things you may revisit years later, including whether a home equity line or HELOC is right for you.

Burke Financial provides expert, impartial, personalized advice. Our tips for refinancing could make the difference between making monthly payments and not making them. You can read about interest rates and refinancing options, but the best way to learn what’s right for you is to contact Burke Financial today.

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