Bank of Canada Governor Tiff Macklem recently announced a surprising 25 basis points rate hike, following a "pause" in rate increases earlier in the year, which brought the lending rate to 5%. This decision was based on two key factors: persistent underlying inflationary pressures and the need to balance the risks of tightening monetary policy too much or too little.

For homeowners and prospective buyers, this development has immediate implications. Homebuyers will face increased borrowing costs, impacting their affordability in the housing market. During the spring market, with rising home sales and limited supply, buyers were already experiencing pressure. However, there is some good news as the supply of listed properties is showing signs of improvement, with a 6.8% month-over-month increase in newly listed properties according to CREA's national statistics.

Existing homeowners with variable mortgages will also experience higher mortgage payments due to the rate hike. Those looking to renew their mortgage may be surprised by the significant increase in rates compared to the historically low levels seen a few years ago.

CREA Senior Economist Shaun Cathcart pointed out that the latest 50 basis points increase might not be as easily absorbed as it would have been a year ago. Cumulative rate hikes can have a considerable impact, and policymakers are concerned about the strain this may put on some mortgage holders.

Moreover, existing homeowners with fixed mortgages might think twice about selling and buying a new property, as their mortgage rates will increase, potentially affecting their decision-making.

Now, let's do a quick calculation to understand the impact on a mortgage. Assuming the average Canadian home price is around $700,000 (excluding high-priced areas), with a 10% down payment and a five-year fixed-rate mortgage, the recent interest rate hike would result in an approximately $100 increase in the monthly payment, as estimated by REALTOR.ca's Mortgage Calculator.

In summary, the Bank of Canada's rate hike will have varying effects on homeowners and home buyers, leading to increased borrowing costs and mortgage payments. The market dynamics are shifting, and borrowers need to carefully consider their options and affordability in light of these changes.