Interest rates for mortgages have been incredibly low for the last number of years. Over the past year, however, the Bank of Canada has raised the prime rate eight times. What does this mean for the real estate market?
Higher Interest Rates = Less Demand
Higher interest rates mean the cost of owning a home is more expensive. This is because moreof your monthly payment goes to interest and less is going to the principal amount of the mortgage. As a result, the demand for real estate declines making more inventory available on the market as demand falls. As an example, a mortgage of approximately $500,000 at 4% would result in a monthly payment of about $2.609. At 6% this payment would rise to $3,173.
Higher Interest Rates = Lower Prices
Because demand falls when interest rates rise, the direct impact is that home prices tend to drop to attract new buyers. Buying during a down market can often mean higher profits down the road once the market rebounds and prices, once again, rise.
Lower Interest Rates = More Demand
On the flip side, if interest rates are low, there tends to be a higher demand from buyers, which reduces inventory and can create a seller’s market. When interest rates are low, the mortgage principal is paid down faster and the home owners equity in the asset increases as well.
Lower Interest Rates = Higher Prices
Lower interest rates can drive prices upward since inventory can remain relatively low, while demand is high. We’ve all seen the news from cities like Vancouver or Toronto where bidding wars were common and prices were driven ever higher because there were too many buyers and not enough houses for sale. Lucky for the sellers, but it made for difficult times for many buyers.
Current Market In Canada
From the peak of early 2022, real estate markets across the country have dropped in varying degrees. The overall outlook for the next year or two is that prices will continue to fall throughthe first part of 2023 and will gradually begin to recover towards the end of the year and into 2024. How much markets fall or rise will depend on their geographic location. The major metropolitan areas will experience significantly more impact than smaller markets and rural areas.
What Can Home Owners Do To Prepare For Higher Interest Rates
If you have a mortgage due to expire and you’re facing an increased interest rate when you renew, now is a good time to prepare for the increase.
- Pay down loans or other debt while rates are lower
- If you have a variety of debt, pay down the ones with the highest interest rates first. This will reduce the amount of interest you’ll pay over the long term by reducing the balance owing now
- If you are on a variable rate mortgage, and rates are continuing to rise, talk to your lender about locking in your mortgage before rates go even higher
- Get a mortgage pre-approval if you’re looking for a new home. This locks in your interest rate for 90 or 120 days and gives you the opportunity to find a home at a lower rate
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