Why this message to you today? Back in April, the Bank of Canada made its first of several anticipated benchmark leading rate increases by increasing the current benchmark lending rate by 50 basis points, bringing the benchmark rate to 1.00%. This was the first 50-point increase from the Central Bank since 2000 and was in addition to the 25-basis point increase made in March. This means that over a period of just a little over a Month Canadians saw a total benchmark lending rate increase of 75-basis points (.25% to 1.00%). Inflation rates are currently at a 30-year high of 5.70% and are expected to increase to 6% in the first quarter of 2022. It is expected that due to the increased rate of inflation that further increases to the benchmark rate will be required and we may see another 50-point increase in June and July, which would bring the total benchmark rate to 2.00% leading into the second half of 2022. Some analysts predict that this will continue into 2023 with further benchmark rate increases leading to a total benchmark rate of up to 2.75% by the end of 2023.
Why should this be important to you? As many Canadians will renew their mortgages over the next several years, they may find that their current mortgage payments have drastically increased. The current average mortgage in Canada is approximately $372,000, which would mean that if your mortgage rate were to increase by 2.50% you would see your monthly mortgage payment increase by $400 to $500 per month. This additional cost can have quite a considerable impact on most Canadians ability to continue to support their current lifestyle expenses, especially at a time when we are seeing the cost of living and basic goods also increasing.
The bottom line: This will make tracking your day-to-day spending increasingly important. This may mean that some variable/leisure expenses may need to be cut back, or perhaps it may be more beneficial to focus on paying down your current mortgage to help lessen the impact of a large rate increase/ interest costs upon renewal. Keeping this in mind will help avoid a situation where you now quickly find your expenses are higher than your current means to support these expenses, which could lead to accumulating large amounts of debt over a very short period during a time with a high-interest cost to barrow.
Road To Mastery Principle: It is always best to work from a position of strength by being proactive in considering all of your options.