The prime rate at the Royal Bank of Canada will rise to 2.7 percent from 2.45 percent, the country’s largest bank announced on Wednesday after the Bank of Canada hiked its benchmark rate by 25 basis points.
The prime rate will rise on Thursday, according to the lender.
Despite high uncertainty after Russia’s invasion of Ukraine, the Bank of Canada raised its interest rates for the first time since October 2018 to 0.50 percent from a record-low of 0.25 percent. They suggested they would need to rise higher.
Variable-rate mortgages have gained tremendous popularity across property owners, owing to the largest spread among them and fixed rates in three and a half years, as bond yields have climbed in expectation of stronger central bank regulations.
According to central bank data, variable loans accounted for 28% of outstanding mortgages in December, the largest percentage since at least 2016. Since July, they have accounted for more than half of all new mortgages, reaching 55% in December, the maximum level since the Bank of Canada started tracking the statistics in 2013.
In 2022, many Canadians chose variable-rate mortgages, stated James Laird, the co-founder of Ratehub.ca, a mortgage interest rate comparing web portal.
Nonetheless, according to Laird, the 25-basis-point hike in prime rates is not likely to negatively influence house demand.
Although supply restrictions and immigration-driven growing populations imply that the real estate market is unlikely to flip in favor of buyers, he added that rate hikes of 1 to 1.25 percentage points are more likely to bite.
On the other hand, higher mortgage rates are welcome news for lenders, as they are projected to result in a long-awaited increase in bank profits, which low-interest rates have strained.
As governments enforced lockdowns and restrictions in reaction to the coronavirus outbreak, Canadian banks reduced their prime rates to the lowest possible level in a decade in March 2020. Easy lending has driven a housing boom, with the average price up 21% year over year in January to a new high.
According to Statistics Canada, mortgages have accounted for roughly 90% of new lending since 2016, pushing household debt to 177 percent of disposable income, making Canada one of the ten most indebted countries in the Organization for Economic Cooperation and Development (OECD).
Canada’s central bank and financial regulator have consistently mentioned housing market instability and excessive household debt as the country’s key financial weaknesses.