We’ve been pretty spoiled over the past few years with historically low interest rates. Although we all knew it couldn’t last, a lot of people weren’t prepared for the Bank of Canada’s aggressive approach to managing inflation. We saw a few smaller increases so far this year, however, nothing compared to the most recent. The current benchmark interest rate now sits at 2.5 percent, a major difference from the .25 percent we saw as we entered the year. This is the highest individual increase we’ve seen since 1998. But does this have any effect on buyers and homeowners? Read on to see how interest rates will impact you.
Impact on the Real Estate Market
As soon as the central bank hinted at higher rates, the Toronto real estate market started to cool. While unbearable prices in hand with low inventories made it feel impossible to own a home for most people, we are seeing some relief. Although we continue to see average prices drop month over month, we’re still seeing increases year over year. With the recent full percentage point increase and promises of more to come, that reversal is likely to continue. However, banks will be offering lower mortgages to buyers as it becomes harder to meet the stress test requirements. This will put homes out of reach for many, even as housing prices drop. As always, the trusty Toronto condo could still be within reach with an average price of just $771,267 in the 416 area.
Curious about the Toronto real estate market? Take a look at our 10-year recap of market activity in the GTA here.
Impact On Your Fixed Mortgage Rate
If you have a fixed mortgage rate, your rate is locked in. At the moment the change won’t impact you at all. However, depending on when your mortgage is up for renewal you could face an interest increase. Canadian banks like RBC and TD raised their prime lending rates from 3.7 percent to 4.7 percent following the Bank of Canada’s move. So just keep an eye on those rates if you’re approaching your renewal.
Talking to your bank wouldn’t hurt, to see if the timing is right to renegotiate a little earlier. It’s all about balance with those interest rates. If you have a really low interest rate right now, and there is a steep penalty, it might make more sense to ride out your mortgage. If your interest rates are a little higher, and the penalty isn’t too high, then renegotiating now might be the answer. Either way, you don’t have to be in panic mode just yet.
Navigating a shifting real estate market can be a challenge. Take a look at some of these resources to learn more about the market here:
- The Key to Building Home Equity in the Toronto Real Estate Market
- The Seven Smartest Ways You Can Afford a Toronto Home Right Now
- Home Buying Fatigue? Here’s Why Shaking it Off Could Help You Find a Home in the GTA
Impact On Your Variable Mortgage Rate
Unfortunately, variable mortgages are impacted by rising interest rates. If you have a variable mortgage rate you were willing to take some risk, but now’s the time to ask yourself how much of an increase you can bear. Let’s keep in mind the Bank of Canada has raised its rates four times since March. The last one was a doozy at a full percentage point. Because inflation is so high, you can bet your bottom dollar they intend to continue to increase interest rates to try to cool down borrowing.
Although you went into this with your eyes wide open, it looks like the glory days of riding on record low interest rates are ending. If you still feel confident you’re up to the challenge, keep calm and carry on. However, if you find you’re not sleeping or anxiously calculating your expenses, now is probably the time to calculate your mortgage break penalties. Because penalties tend to be three months of interest, you have to decide which move will provide you more peace of mind.
Are you planning to sell your Toronto home soon? Check out our Home Selling FAQ here.
Impact On Home Buyers
If you are considering buying right now, the Bank of Canada increases are impacting fixed mortgage rates. So, you’re facing the stress test with higher interest rates which means it could be harder to qualify for a mortgage. Already, buyers are taking to the fence to keep an eye on where interest rates and housing prices will pan out. But there are two sides of the story to consider:
- Side 1: Although we’re not in a buyers’ market, buyers do have a little more negotiating power because more people are sitting on the sidelines right now. That means you could find a dream home at a more reasonable price and with conditions that make you happy. This could help offset the cost of interest rates. Speak to your bank to see how much they’re willing to lend you and then get pre-approved to lock in your interest rate. This allows you to get a relatively low interest rate and take advantage of a more buyer-friendly market.
- Side 2: Don’t underestimate the impact of interest rates on your ability to qualify and afford a mortgage. If you want to get pre-approval, do so now. To put things in perspective, to pass the stress test you’ll need to afford seven percent for fixed-rate loans, and six percent for variable loans. Be very careful to understand how much your monthly mortgage payments are, based on the maximum amount the bank offers you. You can use our mortgage calculator to get an idea how those numbers change even with slight interest rate increases.
If the Bank of Canada says it’s going to increase interest rates, you can be sure banks will adjust fixed rates. This will impact mortgage payments if you aren’t locked in now.
Are you planning to buy a home in this market? Education is your best resource! Here are some guides, articles, and a mortgage calculator to help you get started:
- Home Buying FAQ
- Can Home Buyers and Sellers Benefit from Balance in the GTA Market?
- New Homes Vs. Resale: Which Builds Equity Faster?
- Calculate Your Mortgage
Impact On Home Sellers
Although decreasing prices might have you spooked, this is still a good time to sell. You’ll see more buying power for your next home and stay ahead of increasing interest rates. It might take longer to sell, and a bidding war might not be in the cards, but everything balances out nicely once you’re on the offer side of the negotiation table. However, you want to check your payoff quote to make sure your equity is healthy enough for a hefty down payment for your next home. If it’s too soon after purchasing, you might also face a prepayment penalty. So, make sure you understand your equity, penalties, and mortgage payments on your next home before you decide to sell.
Here’s the impact in bite-sized pieces:
- Homeowners with fixed rates can hold their breath if they’re still a few years out from renewal. However, if you’re coming up to renewal, you might consider speaking to your bank right away to renegotiate at current rates.
- Those with variable mortgages are facing a bigger challenge, but it all depends on how much risk you can bear.
- Buyers should apply for pre-approval to lock into current interest rates that are still quite low.
- In some cases, buyers could find rising interest rates are counterbalanced by declining prices.
- Condos remain a good option for those who qualify for lower mortgages, offering an opportunity for buyers to get into the market while interest rates are still relatively low.
- Higher borrowing costs will continue to impact sales, and prices will likely continue to drop month over month with less buyers competing for listings.
- Sellers could still be in a good position to sell depending on their home equity situation.
If you aren’t sure what all these numbers mean, The Christine Cowern Team can help you understand how mortgage rates will impact your real estate decisions. Give us a call at 416.291.7372 or email us at email@example.com. We’d love to work with you!