Canada's biggest banks increased their prime lending rates on Thursday following the Bank of Canada's surprise 100 basis point hike of its benchmark interest rate.
The country's Big Five banks – Royal Bank of Canada (RY.TO), TD Bank (TD.TO), Bank of Montreal (BMO.TO), Scotiabank (BNS.TO), and CIBC (CM.TO) – all announced increases to their prime rates that go into effect on Thursday. Each bank says it will raise its prime rate by 100 basis points, from 3.70 per cent to 4.70 per cent.
The prime rate is the annual interest rate that banks and financial institutions use to set interest rates for loans and lines of credit. Increases to the Bank of Canada's overnight rate will affect variable-rate mortgages, but not fixed mortgages.
Those with variable-rate mortgages or a home equity line of credit will see an increase to monthly payments as a result of the central bank's latest hike.
According to Ratehub.ca's mortgage calculator, the monthly mortgage payment for an average priced home of $711,000 (with 10 per cent down amortized over 25 years) based on a typical five-year variable rate of 2.5 per cent would be $2,955.
With the Bank of Canada's full percentage point increase, that variable mortgage rate would increase to 3.5 per cent and the monthly payment would jump by $339 a month to $3,294.
The Bank of Canada raised its benchmark rate by 100 basis points on Wednesday, a surprise move that exceeded economist expectations, as the central bank attempts to set a firehose against scorching inflation.
The unexpected and supersized increase is the fourth consecutive hike and brings the Bank's policy interest rate to 2.5 per cent, the highest level since 2008.
What that means for the housing market
The hike is expected to put further pressure on the Canadian housing market, which continued to cool in May amid rising interest rates, according to the Canadian Real Estate Association (CREA). Housing market data for June is expected to be released by CREA on Friday.
Bank of Canada Senior Deputy Governor Carolyn Rogers said at a press conference on Wednesday that while homeowners with variable rate mortgages will see interest rates go up, it is a small segment of the population. Rogers says that 65 per cent of Canadians are homeowners, with 35 per cent having a mortgage and the "vast majority" of those are fixed-rate mortgages.
"Right now and for the last year we know that housing activity and housing prices have been unsustainably high. We've seen a spike in demand, low interest rates combined with chronically low supply and we've had very elevated prices," Rogers said.
"Our goal is to get that demand down and part of restoring the balance of supply and demand in the Canadian economy is restoring that balance in the housing market. That's what we're aiming to do."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.