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Banks rush to raise prime rates after Bank of Canada's hefty hike

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A sign for the Royal Bank of Canada in Toronto, Ontario, Canada December 13, 2021.  REUTERS/Carlos Osorio
Royal Bank is typically the first to move on rates after a Bank of Canada rate hike (REUTERS/Carlos Osorio)

Royal Bank of Canada (RY.TO) and TD Bank (TD.TO) are raising their prime interest rates, hours after the Bank of Canada announced it is raising its benchmark interest rate by 50 basis points.

Royal Bank kicked off the increases. The 50 basis-point increase by Canada's largest bank by market cap mirrors the Bank of Canada's hike, taking RBC's prime rate from 2.70 to 3.20 per cent.

TD followed minutes later, also increasing its prime rate to 3.20 per cent. Bank of Montreal (BMO.TO), Scotiabank (BNS.TO), and CIBC (CM.TO) followed with the same bump.

Canada's central bank raised its key rate to 1 per cent to fight surging inflation, which at 5.7 per cent is at the highest level since 1991.

“Inflation is too high. It is higher than we expected and it’s going to be elevated for longer than we previously thought,” said Bank of Canada Governor Tiff Macklem during a news conference.

“We need higher interest rates.”

Variable mortgage rates going up

Increases to the overnight rate trickle down to variable-rate mortgages but won't directly affect fixed-rate mortgages.

LowestRates.ca used its mortgage calculator to crunch the numbers.

It says for an average priced Canadian home of $860,000 (with 15 per cent down amortized over 25 years), monthly mortgage payments based on a typical best five-year variable rate today of two per cent would be about $3,197.

The same mortgage with a 50 basis point rate rise means the estimated payment rises to $3,383, an increase of $186 per month or $2,232 per year.

Also See: The latest real estate news for housing prices, mortgage rates, markets, luxury properties and more at Yahoo Finance Canada.

"Some variable rate holders may think about switching to a fixed rate to bring some stability to their outlook, but anyone with variable rate will still be saving money over a fixed rate right now," said Leah Zlatkin, licensed mortgage broker.

"Your best approach is to budget for more increases and talk to your broker about your options.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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