The big problem with the sharp rise in interest rates? The poor and indebted are impoverished in favor of debt-free households that have large savings to invest.
According to central banks like the Bank of Canada or the US Federal Reserve, tightening monetary policy is the best medicine to combat inflation.
With inflation stubborn, the monks at the Bank of Canada under Governor Tiff Macklem saw fit to raise interest rates from a low of 0.25% in February 2022 to a 22-year high, or 5.0%, this week. As a result, all banking institutions have been forced to follow in the Bank of Canada’s footsteps and adjust their interest rates at each of the 10 hikes over the past 16 months.
Therefore, interest rates have increased by the same amount or nearly on the entire range of loans, whether they are mortgages, personal loans, auto loans, business loans, commercial loans, or other consumer loans.
As a result, households and companies are (or are becoming) more indebted than ever before, while inflation makes everything enormously more expensive.
mortgage victim
All households using adjustable rate mortgages will be hit the hardest. In February 2022, just before the start of the Bank of Canada’s interest rate hike series, the range of floating interest rates was 1.47% to 1.87%, according to Statistics Canada. Today, variable mortgage interest rates range from 6.3% to 7.2%.
For every $100,000 mortgage tranche depreciated over 25 years, the household, whose adjustable-rate mortgage rate rose from 1.85% to 6.60%, or 4.75 percentage points (same as the federal funds rate), from February 2022 to the present, must are struggling with a 62.4% increase in monthly mortgage payments.
Per $100,000, the household’s monthly payment from $416.25 in February 2022 is now $675.90. On an annual basis, the payout increases from $4,995 to $8,110, an increase of $3,115 per $100,000 mortgage. For a $300,000 mortgage, the surcharge payable annually is $9,345. For a $400,000 mortgage, that’s $12,460.
Households with fixed-rate mortgages also have to trawl through their wallets when extending their respective mortgages.
Just 15 months ago it was common to trade a fixed-rate mortgage with an interest rate of less than 3%, even as low as 2.5%. Today, the one-year maturity is 6.8 to 7.0%; that of 3 years from 5.90 to 6.54%; that of 5 years from 5.30 to 6.49%.
AN INFLATIONAL TIFF MACKLEM
Here is a very important fact to emphasize. Bank of Canada governor Tiff Macklem is suggesting that interest rates could rise further if inflation continues to withstand their horse medicine.
The problem? It should be noted that the main factor contributing to the 12-month (May 2022 to May 2023) change in the CPI was the cost of mortgage interest, which increased by 29.9%. Because of whom? Uh yes! By Tiff Macklem and his monetary tightening policy.
In addition, another key inflation factor from Statistics Canada is owner-performed maintenance and repairs, which increased by 8.2% over the 12-month period.
It goes without saying that these two factors alone are causing huge problems for hundreds of thousands of homeowners and shattering the dreams of thousands of young couples looking to own their own home.
Most affected
Households with well-stocked savings accounts are the big winners from the Bank of Canada’s monetary tightening.
Just under a year ago, guaranteed investment certificates brought in peanuts of around 1 to 2.5% as returns. Today you can get 5% on various conditions. And a bit more at small banking institutions like Laurentian Bank and its subsidiaries B2B Bank and LBC Trust, whose Quebec bank is for sale.
It’s also a bonanza for investors looking to buy municipal, provincial, or federal bonds that pose little or no risk if held to maturity.
