The Bank of Canada (BoC) has maintained a steady policy rate of 2.25% for nearly a year, providing stability for Canadians with variable-rate mortgages. However, rising inflation, fuel prices, and global trade tensions are now putting pressure on the BoC to reconsider its stance. With the next rate decision approaching on October 28, economists and bond traders are increasingly predicting a rate hike.
Inflation in Canada rose by 3.0% year-over-year in August, hitting the upper limit of the BoC's target range of 1% to 3%. While excluding gasoline, the increase is closer to 2.4%, which is within the BoC's comfort zone. The BoC has warned that inflationary risks are increasing, and it is prepared to adjust monetary policy as needed. Forecasters are divided on the timing of potential rate hikes, with some expecting an October hike, others predicting two hikes by the end of 2026, and a few anticipating a gradual increase starting in early 2027.
A 1% increase in the prime rate, which is currently 4.45%, would significantly impact Canadians with variable-rate mortgages. For a hypothetical $500,000 mortgage with 25 years left on the amortization, a 1% rate hike would increase monthly payments by approximately $280, or nearly $3,400 annually. This could stretch the amortization period from 25 to about 31 years. Homeowners with home equity lines of credit (HELOCs) would also feel the impact, with interest payments rising by about $500 annually.
While a rate hike isn't guaranteed, Canadians are advised to prepare for potential increases. Steps include understanding the type of mortgage, calculating the impact of a 1% rate increase, using prepayment privileges, paying down HELOC balances, and considering converting to a fixed-rate mortgage without penalty. The BoC is cautious about raising rates unnecessarily, but it will act if inflationary pressures persist.