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What You Should Know About Rising

Interest Rates in Canada

Michelle McNally courtesy REALTOR.ca
F or the first time since 2018, the Bank of Canada (BoC) increased its target for the mortgage-influencing overnight

rate earlier this year, kick-starting what’s predicted to be one of many increases to mortgage rates in 2022.
Experts have slightly different takes on where the overnight rate—which influences how banks will determine
their own lending rates—will arrive by the end of 2022. Generally speaking, it’s expected the overnight rate will hit
around 2.75% by the end of the year.

As rates rise, what does this mean for existing mortgage holders or those who are looking to get into the housing
market?
Reza Sabour, a Vancouver-based senior mortgage advisor with Centum Financial Services LP, and Sung Lee, a

RATESDOTCA expert and licensed mortgage agent, share their knowledge on rising interest rates and its effect on
real estate.
Why and how do rates go up?

When we look at why mortgage interest rates are rising now, one of the biggest reasons is to tame inflation, which
grew 6.8% annually in April, the highest rate since 1991.

Sabour explains that fixed and variable rates are determined by different factors. Fixed rates tend to mirror the
Canadian bond market, and rise as the bond yield increases. Variable rates, on the other hand, are tied to the prime
rate, which is based on the BoC’s overnight rate. The overnight lending rate reflects the overall state of the economy,
which includes inflation, gross domestic product (GDP) growth and job numbers.

Any time the overnight rate changes, it impacts consumers with a product tied to the prime rate, such as variable rate
mortgage products, Home Equity Lines of Credit (HELOCs), and other personalized credit, Lee explains.

As the economy starts to recover from the COVID-19 pandemic and we enter a quantitative tightening period, interest
rates are now rising back to pre-pandemic levels.
“I try to explain to my clients that when rates are ultra-low—sub 10%—it’s obviously great as a borrower, but it’s not
a very good sign of where the economy is overall when the government is forced to spend so much on stimulus to
make things affordable,” said Sabour. “Now that we’re seeing the economy recovering quite rapidly and quite robustly,
we’re obviously seeing rates going back to what they really should kind of be at.”

Interest rates for fixed mortgage holders started increasing in fall 2021. Now, with the BoC’s overnight rate increase
in March and again in April, variable rate holders will notice their rates rise as well.
“For those individuals with a variable rate product with variable payments, they will see that increase,” said Lee. “Mind
you, if you’re on a fixed-rate mortgage, you won’t notice anything, unless it comes to renewal time. That’s when you’re
going to be hit with a higher rate than what you may have initially had.”
How do higher rates affect your ability to qualify for a mortgage?

When mortgage rates go up, it tends to affect a borrower’s budget and how much mortgage they can qualify for,
especially when we consider the stress test and the types of mortgage rates out there.
“For people about to get into the market, the important thing to understand is, if they’re going to go for a fixed-
rate mortgage, their stress test has now gone up,” said Sabour. “So now we have a situation where the stress test is

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