May 21, 2022 | Real Estate

If you’ve been paying attention to the news lately, you will have likely heard something about The Bank of Canada (BOC) increasing its lending rates. Buyers and sellers in Toronto have been left wondering how these rate increases will impact them in the short and long-term. 

Whether you’re thinking about selling your Etobicoke home or buying a home in the near future, there are a few things you need to know first. 

Here’s a closer look at everything you need to know about rising interest rates in Canada:

What is The Bank of Canada Interest Rate? 

Sometimes referred to as the “Overnight Rate” or “Policy Rate,” the BOC sets the benchmark interest rate that determines how much banks pay to borrow money from each other. This rate directly impacts consumers as the Policy Rate eventually trickles down to affect the “Prime Rate.”

So when you are borrowing money from a bank and they talk about the “Prime Rate” that is influenced directly by the BOC Policy Rate. 

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Why are the Interest Rates Going Up? 

Back in the spring of 2020, when the COVID-19 pandemic first hit Canada, the BOC cut its interest rates to practically zero. This was a strategic move intended to help Canadians get easier access to borrowing during a time of crises and uncertainty. 

Reducing the interest rates also helped protect our economy during the pandemic, and as we navigated the waters over the past two years, BOC officials would weigh in on Canada’s economic recovery. Until recently, various waves of COVID like the Omicron and Delta waves prevented the bank from making any decisions about increasing the rates. 

However, recently, we have noticed a dramatic increase in inflation, which signaled that the economy was recovering nicely and that the record-low interest rates were no longer sustainable. 

When Did Interest Rates Go Up in Canada? 

In early March, the BOC hiked its interest rate from 0.25% to 0.50%. In April, they made the surprising choice to act aggressively and increase the rate by 50 basis points to 1.5%. This made waves as it was the single largest interest rate spike in over 20 years. 

However, economists and bank officials stated that drastic measures were needed to combat rising inflation. 

How Do Interest Rate Hikes Impact Homeowners? 

If you are a homeowner in Toronto, the impact these interest rate hikes will have on you depends on the type of mortgage you have. Fixed rate mortgages come with slightly higher rates, because the rate is locked in for the entirety of the mortgage term (typically 5 years). 

However, variable rate mortgages can fluctuate throughout the term and are heavily influenced by the prime lending rate. Homeowners with a variable rate mortgage can expect to see their mortgage payments or their amortization period change depending on the details of their mortgage agreement.

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How Do Interest Rate Hikes Impact Home Buyers? 

When the interest rates were slashed at the start of the pandemic, it kicked off a whirlwind few years in the real estate market. Buyers lined up to obtain mortgage financing at the lowest rates in history. 

This, along with other factors, created the strong sellers market we see today. As the level of buyers increased past the available inventory of homes, home prices began to rise. 

Many experts believe that raising interest rates will have a cooling effect on the current real estate market and anecdotally, we’re seeing the truth. Although prices in the city are still significantly higher year-over-year, they are beginning to stabilize month-over-month. 

For buyers who are seeking financing now, they will need to pre-qualify at a higher rate than they would have in past months. 

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What Can Sellers Expect From Mortgage Rate Increases? 

The Toronto real estate market has been heavily favoured by sellers for the past two years. Sellers have experienced a busy period where homes sell quickly for well over the list price and with multiple offers and bidding wars being the norm. 

With the higher interest rates, sellers may see the market start to tilt back toward buyers. They may need to adjust their expectations on their home sale. Homes may sell for closer to the list price, with more conditions, and after being on the market for longer. 

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The Important Thing to Remember

While there may be a slight panic in the air as more rate increases are announced over the next several months, it’s important to remember that interest rates are still at a historical low. In 2019, before the pandemic, BOC interest rates were at 1.75%.

Whether you are planning to buy or sell in the Toronto real estate market, an experienced real estate agent can help you navigate uncertainties in the market. Contact us today or sign up for our newsletter below for the latest real estate information delivered right to you.