Buying a property may get even harder. 🏠
Canada's interest rate is expected to make a major jump of around 50 base points – a.k.a 0.5% – this week to 1.5%, according to CBC News. The change is likely to impact many Canadians, including new homebuyers hoping to get on the property ladder.
According to Leah Zlatkin, a licensed mortgage broker and LowestRates.ca expert, homeowners and new buyers should be especially aware of their financial standing when the interest rate is hiked up.
“Homebuyers and owners need to continue to run the numbers on their budgets to be prepared," said Zlatkin. "Including those folks who have taken out home equity loans to fund renovations or second home purchases over the pandemic.”
The federal prime interest rate is set by the Bank Of Canada and it determines the base interest rate banks must set when borrowing from each other.
When it's higher, borrowing becomes more expensive for banks, and therefore consumers, and when it's lower, we get the opposite reaction.
A big place where a homebuyer can be hit by these interest rate hikes is when taking out a mortgage.
This is especially the case if you opt to take out a variable interest rate mortgage as opposed to a fixed-rate mortgage. A variable rate mortgage is one that fluctuates based on the prime interest rate set by the federal bank, along with a bunch of other factors.
While that's useful in times when the interest rate is low when the interest rate is high and is expected to continue rising, buying a home could get even more costly.
Zlatkin also outlined how a Home Equity Line of Credit for homeowners, new and old, is also impacted by an increasing interest rate.
Such loans, which use the value of your home as collateral, are also similarly variable and are typically set as the prime rate plus 0.5%. So, if you've taken out a Home Equity Line of Credit for a renovation or other big expense, you could soon see a higher monthly payment.
The increase in the prime interest rate is an attempt to slow the current 30-year high inflation rate in Canada. The rising rate has had an impact of the cost of essentials like food, shelter and gasoline, among other things.
In April alone, the inflation rate on food was the highest it's been since 1981.
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