London, Ont. homeowners prepare as Bank of Canada raises interest rates

Many people who purchased homes in 2018 and 2019 are preparing for a big hit, as they approach renewal dates of mortgages that will see a jump of over double what they first signed up for.

"It's under 3 per cent. So I know it's coming up and I know I'm going to get bitten and I just hope it's not too bad," said homeowner Ryan Cleg, who bought his home in 2019.

The Bank of Canada raised the key interest rate another quarter per cent Wednesday reaching 5 per cent. Mortgage rates are significantly higher than that, sitting in the seven to 10 per cent range, depending on the term.

“There's definitely some concern. It's not just the cost of that mortgage payment going up. You know, everything else is up. And so inflation, you know, has caused groceries to go up, gas to go up," explained Yvette Helwig, a mortgage broker with Dominion Lending.

The reason regulators are continuing to raise the key rate is to try avoid what some economists call entrenched inflation.

"It has to do with the fact that one of the in core inflation that hasn't gone down has been service inflation. And service inflation is mostly a national type of inflation, something that doesn't depend on what happens in the U.S. and the rest of the planet,” said Cristián Bravo, an associate professor at Western University and Canada Research Chair in Banking and Insurance Analytics.

Homeowners like Cleg, approaching a new rate, are preparing new household budgets.

“I'll have to probably look at my overall budget,” he said. “I'll have to make sure that, you know, I know where my money's going and I'm just going to shop around a little bit.”

Helwig counters that factors beyond mortgage payments will force a tightening of the belt.

“So everything is up and, you know, trying to budget and pull back. I find that people really just don't know how to budget very well,” he said. “And the financial literacy, you know, just isn't out there. So I think that's the struggle.”

The worry is these increases will drive the country into a recession before there is relief, according to Bravo.

“What they think is that we're going to have a significant slowdown, but no recession,” he said. “In fact, that's the crucial analysis that they make in their assumptions. They think that growth is going to come down for around three per cent of inflation to one per cent above inflation.”

While most economists believe that will be the end of the increases, they warn not to expect rates to drop for at least six months to a year.