Interest Rates are on the Rise: What Buyers and Sellers Need to Know

Dated: April 13 2022

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Since the beginning of 2022, interest rates have been a hot topic for both economists and everyday Canadians. During the early stages of the COVID-19 pandemic, the Bank of Canada lowered interest rates in an attempt to offset economic damage. Two years later, inflation rates in Canada jumped to the highest they’ve been in 30 years as a result of frequent lending.

Now the Bank of Canada is taking steps to fight inflation by raising target interest rates. By doing this, it becomes more expensive for financial institutions to borrow money, slowing down inflation. In March of this year, the Bank of Canada’s target interest rate grew from 0.25% to 0.50%. Following this initiative, many financial experts anticipated further rate increases in the near future.

This would hold true as on April 13th, 2022, the Bank of Canada announced an additional policy interest rate increase of 50 basis points.  

So how does this impact Canadians?

As financial institutions become subject to higher interest rates, their own interest rates for clients are raised in order to offset costs. As a homeowner, your mortgage is often not only the biggest loan you manage, it’s also a huge portion of your monthly expenses and significantly impacts your overall budget. 

As the Bank of Canada’s target rate continues to grow, interest rates on mortgages are expected to climb too. This could have a big impact on housing costs for Canadians. 

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It’s important to note that nothing is certain just yet. However, we are able to anticipate some of the effects based on current housing trends and how the market has reacted to similar changes in the past. 

Some experts expect the housing market to cool off a little bit as mortgages become more expensive for buyers. Others believe there may be little impact to no impact as demand for housing in Toronto remains high with less inventory entering the market. 

What we do know is that the lower interest rates introduced at the start of the pandemic caused plenty of activity in the housing market. Before this change, the Greater Toronto Area was already a seller’s market. Then as mortgages became cheaper, more buyers rushed to purchase homes. This caused the already high cost of homes in Toronto, the GTA and, pretty much throughout

Ontario, to skyrocket. Now, higher interest rates could mean that fewer buyers will be able to enter the market. 

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Before discussing how these changes could impact buyers, it’s important to understand the impact they will have on current homeowners. For owners who have a mortgage that is up for refinancing, monthly payments are likely to rise. Given the fact that the average detached house in Toronto costs $1.7 Million, an increase in a new interest rate of even just 0.25% can make a big difference. This could make homeowners who don't have extra room in their budget vulnerable. 

Higher interest rates may force some homeowners to put their property on the market if they can no longer afford the monthly payments. This could mean a small increase in housing inventory. That being said, it’s unlikely we will see much of a change in this strong Seller’s Market, as there will remain a significant housing shortage at all levels.  

In the near future, buying a property will become more expensive as mortgage borrowing costs increase. However, this may be potentially offset by a slight market correction and rebalancing of buyers to sellers. This can mean that some properties with motivated sellers may need to be price adjusted lower as inventory sits on the market longer. 

The uncertainty felt by homeowners as to whether they’d be able to find a new home after selling is one of the many factors contributing to low inventory in Toronto and the GTA today. Placing pandemic hesitations aside, in most cases, homeowners have been waiting to list their homes until they have purchased their next property. With such a shortage of inventory, this chicken-before-the-egg scenario has resulted in a stalled flow of listing activity. Where we may see a shift, is when more people begin selling due to higher mortgage carrying costs and the ability to keep up with their payments. There would be more homes on the market for buyers. 

Of course, within Toronto’s notoriously hot neighbourhoods, an increase in inventory is unlikely to trigger a huge drop in home prices. However, it can mean more options for buyers who are able to afford higher mortgage rates. If homeowners are looking to apply for or renew a mortgage, they will need to familiarize themselves with the ‘Stress Test’ thresholds ahead of time to understand the full potential impact. 

The ‘Stress Test’ is a set of rules that regulated lenders in Canada must follow to determine if a homebuyer can qualify for a mortgage. These rules determine whether or not increases in interest rates will impact your ability to pay back your mortgage. Rules for the Stress Test changed in 2021, so having a fresh look at the new qualifying rates is a good idea. 

Want to learn more about Toronto’s housing market? Explore these resources. 

For current sellers, higher interest rates won’t have an immediately noticeable effect. However, for owners who sell their house in the future, it could mean a lower listing price. Long term, fewer buyers will be able to afford a home. In addition to this, sellers should expect increased competition as more homes come on the market. These factors will cause home prices in Ontario to drop down the line.

In the short term, Ontario is still experiencing high demand for housing, with bidding wars being the norm. Buyers are still paying record-high prices and homes don’t stay on the market for very long. If you’re thinking about selling, you may want to consider entering the market sooner rather than later. 

Thinking about buying or selling? Get in touch for a slice of certainty and find out how our experts can help every step of the way!

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Jamie MacLean

Jamie MacLean has over 25 years of marketing experience with extensive knowledge in digital marketing, social media management, website development, public relations, re-branding, brand activations, l....

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