Here is what higher interest rates will mean for Manitobans

Manitobans can now expect new mortgages to be more expensive in the months to come.

After two years of historic lows, interest rates are creeping up, with the Bank of Canada announcing a rate hike on Wednesday.

It’s expected to be the first increase of many.

"We're certainly anticipating four rate increases for this year,” said Elton Ash, regional executive vice president for RE/MAX Canada.

Since the start of the pandemic in March 2020, the Bank of Canada’s overnight interest rate – the base rate lenders use when giving out mortgages and other loans – was set at 0.25%, a historic low meant to stir economic activity amid COVID-19-related restrictions.

Now, the policy interest rate is set at 0.5%.

“A year from now we're looking at the overnight lending rate being at least one per cent higher," said Ash. “And, given historical interest rates over the long term, it’s still an incredibly low interest rate.”

According to a RE/MAX 2020 housing market report, the average residential sale price in Winnipeg jumped from $287,343.00 in 2020 to $311,941.00 in 2021, an increase of nine per cent.

This year, factoring in a steady increase in the overnight lending rate, the report predicts the average residential sale price to jump by 3.5% to an estimated 322,858.94.

It’s a modest increase compared to other Canadian housing markets, though the Manitoba Real Estate Association is still recommending prospective home buyers get a fixed-rate mortgage sooner rather than later.

"The safest bet is to lock in for five years so you know what you're going to get and you know what your payments are going to be, there's not going to be any shocks," said Stewart Elston, a real estate professional and president of the Manitoba Real Estate Association.

“If it looked like rates were moving down, I would give the opposite advice."

Existing fixed-rate mortgages won’t be impacted by the new rate increase until that mortgage comes up for renewal.

Elston recommends prospective first-time homebuyers to take advantage of the current low interest rates with a five-year, fixed-rate mortgage to ensure payments don’t creep up.

“A five-year rate is pretty standard and with any first-time buyers the safest bet is to lock in,” he said. “You know what your payments are going to be, there’s not going to be any shocks.”

Monthly payments for variable-rate mortgages are immediately impacted by the current rate hike and any future increases.

For example, a Manitoban with a $300,000 variable-rate mortgage under a 25-year period could have been paying 1.45% in interest rates before the rate hike, making for monthly payments of $1, 1192.

Under current conditions, with the rate increase of .25% bringing the variable rate to 1.7%, the same Manitoban will be paying $1, 227, a $35 increase.

But, while interest payments on new mortgages are now slightly more expensive, an individual’s ability to acquire a mortgage is still the same.

Currently, the mortgage stress test - a financial review prospective home buyers must undergo to see if they can truly afford a large loan – the rate is set at 5.5%.

“Anyone that’s been tested on that in the last few years will have to test again this year, so those variable rate increases aren’t going to take you out of the market,” said Peter Squires with the Winnipeg regional Real Estate Board.

Despite recent increases in housing prices, the Winnipeg housing market is still far more affordable than other major Canadian cities. Squires says that will help the local housing market stay strong in the face of rising interest rates.

“We have a real advantage because we’re much more affordable in terms of our house prices,” he said.

That helps offset any interest rate increases and they’re going to be very gradual.”

It’s not all about the housing market.

Inflation and the rising price of goods are a key reason behind the Bank of Canada’s rate hike.

Last December, inflation reached a thirty-year high in Canada, when interest rates were at historic lows.

Raising the overnight lending rate is a way to bridge the gap between inflation and interest rates, a means of moderating prices.

“We’re going to see that this is better for us in the long term,” said Shiu-Yik Au, professor of finance and accounting at the University of Manitoba’s Asper School of Business.

“We can’t have prices rating really far ahead and we can’t have super high or super-low interest rates. It’s not good for our economy or for the Canadian people for a long period of time,” he said.

One element of uncertainty in the Bank of Canada’s expected plan to gradually raise interest rates is the conflict in Ukraine.

“The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty,” said the Bank of Canada in Wednesday’s interest rate announcement.

Oil prices and other commodities are already rising, the Bank noted, which could add to rising inflation. Global supply chains could also be disrupted.

“Nothing disrupts macroeconomic stability like war or major global conflicts,” said Au, adding that, for the moment, the conflict in Ukraine is largely contained.

“In the event that Canadian’s economic livelihoods are badly threatened, I expect the Bank of Canada will act very rapidly and very aggressively” to support Canadians with lower interest rates, he said.

The Bank of Canada’s next interest rate announcement is scheduled for April 13.