OTTAWA
The Bank of Canada raised its benchmark interest rate by a quarter point to 2.5 per cent on Wednesday, its first increase since July 2023.
All five of Canada's major banks raised their prime rates by a quarter point to 4.70 per cent in response.
"Look, we get it," Bank of Canada Governor Tiff Macklem told reporters in Ottawa. "It's not going to feel good immediately, but that's how you get inflation back down, and that will feel good for Canadians and Canadian businesses."
The hike will be immediately felt by variable rate mortgage holders, as those rates are directly linked to a bank's prime rate.
Toronto-based mortgage broker Marcus Tzaferis said a 25 basis point increase adds about $70 per month on average to payments for a $500,000 mortgage.
"To a consumer that's already stretched, these 25 basis point incremental increases are going to have an impact," Tzaferis said.
He added that if the central bank hikes rates by another 50 or 75 basis points, "you can see how that will affect people's monthly budgets."
Clay Jarvis, a mortgage expert at Ratehub.ca, said choosing between a variable or fixed rate is challenging in a rising rate environment.
"Variables are lower, and provide flexibility, but future rate increases need to be budgeted for," Jarvis stated. "Fixed rates are raised, but once you qualify your mortgage costs are set. That kind of stability can be worth paying a premium for."
Barbara Best, who recently switched from a variable to a fixed rate mortgage on her Toronto condo, said the higher payment is worth it for certainty.
"It was a jump in payment but it gives me that certainty. It gives me that peace of mind," Best said.
Tzaferis said now is the time to shop around for a fixed rate, especially for those with a mortgage coming up for renewal soon.
"The kind of most critical thing is for Canadians to start their renewal process early," he said.
The rate hike also stands to worsen the already soft housing market.
Deputy governor Carolyn Rogers said Canada's housing market is already struggling, particularly in Ontario and British Columbia, and the rate increase will add to those pressures.
"Certainly, borrowing rates are currently weighing a bit on the housing market. An increase will add to that a bit on the margin," Rogers said, describing a "subdued" outlook for the sector.
Joel Fox, chief operating officer of real estate law platform Ownright, said the hike will add to the dour mood.
"A rate hike likely locks us into year-over-year declines in housing activity for the rest of this year and into next, and I don't see things turning until there's a rate drop," Fox said in a statement.
"The market was already as bleak as we've seen in a long time. The only saving grace is that it's hard to imagine it dropping much further."
Phil Soper, president and CEO of Royal LePage, said the sector's "prolonged weakness is already weighing on economic growth, and higher borrowing costs will only deepen that challenge."
In September, the national average sale price fell 1.6 per cent year-over-year to $666,538, according to the Canadian Real Estate Association.
National home sales were down 7.7 per cent from the same month last year.
The central bank said higher energy and import costs are also expected to raise the costs of housing construction and maintenance through higher prices for materials and equipment.
Michael Waters, CEO of real estate developer Minto Group, said higher interest rates on construction loans, along with rising input costs, "will squeeze margins" and potentially lead to fewer large-scale project completions.
Nicole Emmett of the Canadian Construction Association said higher borrowing costs put pressure on contractors' margins, which are already stretched by supply chain disruptions.
"A home isn't a home without the roads, sewers and watermains that support it," Emmett said in a statement.
The central bank's hike is aimed at preventing high energy prices from causing persistent inflation, which ticked up to 3.1 per cent in September.
Macklem said more rate hikes could be coming if inflation persists in the months ahead.
e2gold.ca reported last week that a Desjardins report predicts a nearly five per cent rise in existing home sales in Ontario next year, though activity remains below long-term norms.
This story was written by the e2gold.ca newsroom from reporting by CBC News and CityNews. Quotes are checked word for word against that reporting.