Understanding How the Bank of Canada’s Increased Interest Rates Affect Buyers and Sellers in Canada

The Bank of Canada raised its benchmark interest rate to 1.5 per cent on Wednesday, June 1, 2022—the biggest increase in over two decades—and signalled that more hikes are on the way.

But how exactly does this rate increase affect real estate in Canada? What does it mean for home buyers and sellers right now?

There are varying opinions as to whether the Bank of Canada’s decision to increase interest rates could result in a correction in the red-hot housing market. Indeed, one of the contributing factors to the exceptional growth in the Canadian housing market has been very low interest rates, giving borrowers more purchasing power and enabling them to compete in fierce bidding wars for residential properties. But that has been shifting as the era of cheap money is coming to an end.

​​Borrowers gravitated to variable-rate mortgages because they were lower but the Bank of Canada’s hiking campaign will soon make variable rates more expensive too.

Nathan Janzen, an economist with RBC, thinks Canada's central bank is on track for a series of larger-than-normal hikes in a row, until its rate gets to roughly three per cent. Canada's benchmark interest rate hasn't hit that level since the 2008 financial crisis. 

"The looming question is whether rates need to rise above that neutral range to get inflation back under control," Janzen said.

Where does that leave buyers looking to purchase a home right now?

Those looking to buy a home may find things getting worse for the next couple of months before they get better as some buyers look to lock in lower rates from pre-approvals.

Asked about the rate hike, federal Finance Minister Chrystia Freeland said financial controls are in place to make sure mortgages don't go underwater. “We have stress tests designed to be sure anyone taking out a mortgage could get through a period of higher interest rates.”

The rate increase is now pushing up the mortgage stress test’s qualifying rate, removing stretched-out buyers from the market. But even those who still qualify for a mortgage will see higher rates reduce the size of the mortgage they can get—and the price they can pay. For households earning the median income, for example, the rise in fixed mortgage rates will shrink the maximum purchase budget by roughly 15%. 

How does this increase affect sellers?

The national average house price has fallen for two months in a row and is said that it’s expected to fall further—a concerning factor for sellers though potentially good news for buyers. 

Owners that banked on the fact that they would be making a huge profit when selling their homes are having to adjust their expectations downward, but even those with no plans to sell are feeling the pinch. Many of these owners purchased their home years ago when mortgage rates of two per cent were easy to find. Today, those mortgages are up for renewal, and the interest rates are in the four per cent range, which could result in them no longer being able to afford the mortgage. They will have to stretch their mortgages over a longer time period to bring the monthly payment down to something more affordable

Despite all the prognostications and expectations that Canadian real estate market prices could ease this year because of interest rates, many forecasts suggest that home valuations will either balance out or continue their upward trajectory for the next few months.

But it’s not all doom and gloom. 

Rather than pose a major threat, rising interest rates are likely to bring welcome changes to the market—including more sustainable activity, fewer price wars, more balanced conditions, and modest price relief for buyers. After the extreme price increases and heated bidding wars of the last year, this would be a positive shift.

With over 18 years of experience as a real estate agent, I am confident that your home buying or selling needs can be met. It takes patience, understanding, creativity, and skillful application of knowledge and resources, but it can be done.

If you have any questions about how this interest rate increase might affect your home buying/selling, please feel free to contact me.