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Making sense of the markets this week: October 30, 2022

Are we nearing the end of BoC interest rate increases?

The biggest story in Canadian markets this week was the Bank of Canada’s decision to go with a relatively modest 0.5% interest rate raise to 3.75%. Given the hot inflation announcements last week, most economists were certain we’d see an aggressive 0.75% hike.

Bank of Canada (BoC) governor Tiff Macklem struck a decidedly more balanced tone than he has in recent months, saying, “We are trying to balance the risks of under- and over-tightening.” 

Most analysts now believe we will see one or two more monthly interest rate increases of 0.25% before a wait-and-see approach comes to the fore.

The good news for Canadians with mortgages? Inflation is eating away the real value of their debt. That bad news involves the following arithmetic:

If you signed up for a 25-year mortgage at a five-year fixed rate back in 2017, your rate was likely around 3%. Today’s 5-year posted rates from the big banks are around 5.6%. You might be able to get a rate closer to 5%—if you shop around.

Using MoneySense’s mortgage payment calculator, we know that if you had a $500,000 mortgage on a $650,000 house back in 2017, you were likely to have a monthly payment of around $2,370. 

Five years later you would have paid off around $73,000 in principal, and $69,000 of interest. If you now renew your mortgage with the same amortization, at a five-year fixed rate of 5%, you’re looking at a new monthly mortgage payment of around $2,800. 

Most Canadians don’t negotiate their mortgage rate, so if you signed on for the posted 5.6% 5-year fixed rate, you’d be looking at a $2,950 monthly payment. Your bank may allow you to stretch out the remaining $427,400 mortgage loan over a new 25-year amortization, but that would still only bring the monthly payment down to around $2,600—and you’re going to pay tens of thousands more in interest payments over the lifetime of the mortgage for this privilege.

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