Updated: January 12, 2025
There is a very real connection between the economy and the real estate market, one that can have an undeniable impact on you whenever you plan to buy or sell a house. The Bank of Canada makes several adjustments throughout the year based on the financial data it receives.
Often, they might increase or decrease the target rate by as little as a quarter percent. It might sound minuscule on paper, but on a transaction worth hundreds of thousands of dollars or more, it can really change things. That’s why it’s important for home buyers and sellers to have a basic understanding of what interest rates mean for their transactions.
In this post, we’ll take a closer look at interest rate fluctuations and how they can affect Toronto home prices.
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Why Interest Rates Change
Eight times throughout each year, the Bank of Canada meets up to set the policy interest rate. This percentage is used to control inflation. More importantly for home buyers and sellers, it’s also used to set many interest rates in the economy—which means it can have a significant impact on borrowers seeking mortgages.
When interest rates rise, borrowing money for a mortgage becomes more expensive. Either less of your payments go toward your principal and more toward interest, or your monthly mortgage payments are higher overall.
In this situation, it’s not uncommon for many prospective buyers to drop out of the market, which means less competition for those who are searching. Housing prices often decrease as a result.
During periods of low interest rates, more buyers tend to get into the market. In response to increased competition, housing prices can rise, especially if listings are scarce. This is exactly what happened back in 2020 and 2021 when the Bank of Canada set the rate to historic lows.
Are you on the hunt for the perfect house? Our featured listings are a great place to begin.
When Interest Rates Hold Steady
Sometimes, the Bank of Canada will examine the current interest rate and decide against making any changes. When the target rate holds steady, lenders tend to follow suit.
The Bank of Canada will typically hold rates in the following scenarios.
- Inflation is under control. When inflation hovers around the 2% mark, they essentially adopt an “if it isn’t broke, don’t fix it” mentality.
- The economic outlook is uncertain. When global events cause alarm, the Bank of Canada may hold the rates to provide a sense of stability. In addition, it can be hard to predict what will happen, so a wait-and-see approach is often the path of choice.
- The US changes their rates. Canada’s economy is almost irrevocably linked to that of the USA, and we will often follow their lead. For example, if they increase their rate but we hold or lower ours, the Canadian dollar could become weaker in the global economy. In turn, the cost of imports become more expensive and drive up inflation.
No matter what decision the Bank of Canada makes, there can be consequences. Lowering the rate could trigger more spending and cause Canadians to take on more debt than they should.
Increasing rates might slow down consumer spending too much and cause a recession. It really is a balancing act! Sometimes, holding steady is the best path until more hard data becomes available.
Are you preparing to buy your dream home? To learn more about the process, read some of our buying resources.
- How Much House Can I Afford?
- What to Look for When Buying a House: Checklist
- Buying a House in Ontario: Why Work With Us
How Interest Rates Affect Home Buyers
Let’s start with the basics. When the interest rate rises, it costs more to borrow money. If you’re preparing to buy a home in Toronto, even a small increase could have a major impact on your bottom line. You could wind up paying thousands and thousands more in interest than you otherwise would.
If you’re starting a search for the ideal home, getting pre-approved before an increase will allow you to lock in the best possible rate. You can maintain it for a set period of time, typically 90 to 120 days.
Keep in mind the different mortgage structures available.
- Fixed mortgages lock you in for the duration of your term. If rates are currently low, it could be a good opportunity to keep your payments manageable. You’ll be protected against future increases until the time comes to renew.
- Variable mortgages are not locked in and can change several times throughout your term. If rates are currently high when you obtain your mortgage, you stand to benefit if and when they go down. However, there’s a catch. If rates increase even more, so will your payments and the amount of interest you pay over time.
Before finalizing your loan, be sure to talk to an experienced mortgage expert to get the best possible rate and terms. One of our local real estate agents can make a referral if necessary.
Is selling your home one of your goals this year? If so, check out the insightful resources below:
- How to Sell Your House: Before You Begin
- 5 Common Mistakes Home Sellers Make
- When Is the Best Time to Sell a House in Toronto
Home Sellers Are Also Impacted
Low interest rates are often associated with strong seller’s markets. Buyers tend to come out in full force when they can get less expensive financing—and bidding wars are frequently the result.
Think about it. When buyers have more power (and can more comfortably afford your home), you’re more likely to see increased competition and enjoy a quicker, more profitable sale. Of course, this is just a general rule. The strategy you should use when you sell will all depend on the specifics of the market.
While it’s always a good idea to have a basic understanding of the factors that could impact your next step, the market is far from straightforward. Fortunately, an experienced real estate professional can help you make sense of the information coming your way—and what it means for your purchase or sale.
Thinking of buying or selling your home in a market that seems to get more complex by the day? Whatever your goals may be, our West Toronto real estate agents can help you get the best possible value. Reach out today at 416-769-3437 or email info@sidorovainwood.com with any questions.
