Canadian Interest Rate Forecast: What to Expect in 2023 and Beyond
The Bank of Canada has been raising interest rates in an effort to combat inflation. This has led to a sharp increase in the cost of borrowing, and it is likely to continue to rise in the coming months.
Typically variable rates are lower than fixed-rate mortgages because you pay extra to have a borrowing cost guaratee. Howver, with the Bank of Canada rate increases this relationship has been temporarily reversed.
On July 12th, the Bank of Canada said, “inflation is forecast to remain about 3% for the next year, before declining gradually to the 2% target in the middle of 2025.”
What does this mean for homeowners and borrowers?
It means rates are unlikely to normalise until 2025.
For homeowners, higher mortgage rates will increase regular mortgage payments. This could put a strain on household budgets, especially for those who are already stretched thin.
For homebuyers with fixed incomes, rising mortgage rates will reduce the size of their mortgage approval. To buy the same priced home they will need a larger down payment.
What can you do to prepare for rising interest rates?
There are a few things you can do to prepare for rising interest rates:
Shop around for the best mortgage rate. You may save hundreds or even thousands of dollars by comparing rates from different lenders.
Consider a fixed-rate mortgage. A fixed-rate mortgage will lock in your interest rate for a set period of time, which can give you peace of mind knowing that your monthly payments will not go up. If you typically prefer a variable rate mortgage, then look closely at the 3-year fixed rates.
Start cutting costs. If you are concerned about how rising interest rates will affect your budget, start cutting costs. First look for ways to reduce your energy bills (i.e., electric & gas). Closely examine if you need all of your streaming and app subscriptions. If you can reduce your costs by $50 to $100 per month it will give you a cushion in case your monthly mortgage payments increase.
Heating and cooling are by far the greatest energy users in the home, making up around 40% of your electric bill. Other big users are washers, dryers, ovens, and stoves.
Rising interest rates are a challenge, but they do not have to be a disaster. By taking steps to prepare, you can protect yourself from the financial impact of rising rates.
In addition to the tips above, here are some other things to keep in mind:
The housing market is might cool in the coming months. Rising interest rates are putting downward pressure on home prices and it can take up to a year for the effect of the most recent rate increases to be felt in the economy.
The economy is facing uncertainty. The war in Ukraine and rising inflation are creating uncertainty in the global economy. This uncertainty may lead to businesses postponing major job creating investments which could lead to slower economic growth in Canada.
Technically, the Bank of Canada is trying to orchestrate an economic slowdown (i.e., soft landing) because lower demand will put less inflationary pressure on prices.
It is important to stay informed about the latest economic news and to make informed financial decisions. By doing so, you can protect yourself from the financial impact of rising interest rates and the other challenges that the economy is facing.
For a detailed forecast of how high rates are expected to be in 2024 click below.
