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Here’s How Canada’s Interest Rate Increase Will Impact Home Ownership

Over the past couple of years, the Canadian economy has shifted in many ways. Among the changes has been an increase in interest rates. Here’s how that is impacting the housing market.
Looking to understand interest rates and how they affect home buying? Read on!

For the first time in four years, the Canadian government increased interest rates in March of 2022. According to TD Bank, the Bank of Canada (BoC) dropped its interest rate at the beginning of the COVID-19 pandemic. This lower rate was maintained through 2020 and 2021. While this helped by offering borrowers some support, “it may also have contributed to a scorching housing market and rising inflation.”

Now, we’re in a period of rising rates, and there are several ways that Canadian homeowners and prospective homeowners will be impacted.

What is An Interest Rate Increase?

In simple terms, a rise in interest rates typically means that borrowing money will cost you more. The Bank of Canada decides upon increases like these, impacting people with mortgages, lines of credit, and other types of loans and debts. Typically, interest rate increases come from needing to manage inflation or other economic factors. So, if you have a loan you are paying off, the payment amounts will increase as your interest rates do.

As you can see, an interest rate increase impacts virtually every aspect of society. Most adults have some form of debt, and a lot of that debt is owed to the bank in some way or another. So, here’s how Canada’s rising interest rates will impact the housing market.

The Impacts on the Market

Rising interest rates make things more expensive in the housing market. This impacts all sides of the market, from the cost of monthly payments to the cost of borrowing. Potential buyers may be priced out of the market, which could impact demand. Home prices are driven by supply and demand, among other factors. Demand could decrease if prospective buyers are being priced out of the market due to un affordable mortgage rates and borrowing costs. Therefore, average home prices could drop as demand does the same. Let’s dive into the specifics.

What Does This Mean For Homeowners?

Increased interest rates will pose an issue for anyone looking to buy a home or renew their mortgage. Fixed-rate payments that are up for renewal will be likely to see an increase in the cost of monthly mortgage payments. Meanwhile, variable-rate mortgages will see an increase even without a renewal. Some fixed-rate borrowers will be in luck for a while as they won’t feel the heat unless their mortgage term is coming up for renewal in the immediate future. Variable-rate borrowers will be hit with a change right away. Either your monthly payments will increase, or you will notice that a more significant chunk of your monthly payment will go towards interest, therefore taking you longer to pay off your mortgage.

An increase in Canadian interest rates sure isn’t ideal for homeowners, but the blow won’t hurt much if you’re in a fixed-rate mortgage term that isn’t ending anytime soon.

What Does This Mean For Potential Buyers?

While we’re certainly not giving investing advice, there are a few things to consider if you’re in a position to buy while interest rates are high. Increasing interest makes buying a home less affordable by increasing monthly payments and borrowing fees. It makes borrowing and paying back more expensive for the borrower. However, this means there will be less buyer competition as many prospective buyers will be priced out of the market. The lessening demand may drive prices down and open up more options for buyers. So, buyers will likely have more choices and be looking at a more affordable housing market. While raising interest rates will hurt when it comes to your mortgage terms and monthly payment amounts, it may save you some serious coin when it comes to the actual price tag of your new home.

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