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The Impact of Rising Interest Rates on Homebuyers

Rising interest rates are a point of concern for all Canadians, especially for homebuyers. As the real estate market continues to surge across the country thanks to high demand and low supply, interest rates continue to increase as well. Below, we explore the impact rising interest rates have on homeowners.

Overview of Interest Rates in Canada

Interest rates are charges imposed on loans and other financial instruments to regulate inflation and stimulate economic growth. Over the years, interest rates in Canada have undergone fluctuations, responding to changes in the financial market, global economic conditions, and domestic factors.

Up until recently, the trend of long-term interest rates in Canada saw a downward fall. In fact, the inflation rate stood at 2% up until the global pandemic. The current inflation rate is 3.3%. The Bank of Canada has been taking steps to reduce the inflation rate back to 2%. The latest hike of interest rates in Canada in August 2023 is reflective of the central bank’s measures to cool down the economy while keeping inflation on track.

Factors Driving Rising Interest Rates in Canada

Why are Canada’s interest rates climbing at such a fast pace? Many financial analysts attribute it to the country recovering from the recent pandemic as the primary source along with the Ukraine war, and climate change.

When there is a growth in demand for credit (money) or if there is a decline in the supply of credit, the interest rates will increase. This is seen with inflation as prices have jumped significantly for goods and services across the country.

Excess demand has triggered the recent interest rate increases brought forth by the Canadian government. The idea behind the increased interest rates is to slow down spending by Canadians to create a more balanced economy.

Implications of Rising Interest Rates on Homebuyers

Interest rates are often compared to a rollercoaster, but since the pandemic, the only way they seem to be going is up. As they climb higher, homebuyers need to understand how these rates affect their present and future buying power when it comes to entering the real estate market.

Increase in Mortgage Rates

Mortgage rates are directly tied to the interest rates set by the Bank of Canada. When the Bank of Canada increases its rate, the prime rate also increases, which in turn affects mortgage rates. It’s important to note that while rising interest rates can lead to higher mortgage rates, this impact may not be immediate or equal for all borrowers. Factors like the mortgage type, term length, and credit rating can all come into play.

For those with fixed-rate mortgages, the impacts are minimal. However, for those with variable-rate mortgages, a rise in interest rates can lead to a significant increase in monthly payments. As always, it’s important for borrowers to do their research and speak with a mortgage specialist to fully understand the impact of rising interest rates on their specific situation.

Reduced Homebuyers Demand

The housing market stability plays a significant role in interest rates for all homeowners and vice versa. In real estate, a low interest rate often leads to an increase in buyers and sellers while high interest rates can quickly reduce homebuyers’ demand.

High interest rates often lead to fewer buyers and those who do buy have much higher mortgage payments than first planned or expected. This can also reduce the purchasing power of homebuyers depending on their financial situation.

Refinancing and Mortgage Renewals

With mortgage refinancing, if your home is assessed at a lower amount compared to the assessment at the time of purchase, it will affect how much you will be able to refinance. Unlike new homebuyers, existing homeowners have seen their mortgage rates rise. According to the current economy, this is expected to continue.

In fact, mortgage brokers are advising homeowners to prepare for higher payments as the rates continue to climb, particularly with renewals. Those who purchased a home during the pandemic years, when interest rates dropped close to zero, or who chose variable or adjustable interest rates, are going to see a change in their mortgage payments.

Financial and Economic Considerations for Homebuyers

Higher interest rates mean that Canadians need to be more conscientious about their spending and consider the implications these rising rates might have on their financial goals.

The Importance of Financial Planning and Budgeting

When it comes to budgeting for a home purchase or refinancing a mortgage, it is crucial to begin early to ensure the required monies are readily available. With a fixed-rate mortgage, it is recommended to renew early to avoid higher rates that most notably would occur. Financial lenders will allow for an early renewal up to six months before the actual date of renewal but may charge a penalty fee if the homeowner wants to renew earlier.

Evaluate Long-term vs. Short-Term Mortgage Strategies

Long-term and short-term mortgages are based on the affordable amount a homeowner can pay for each mortgage payment. Long-term interest rates are offered at a fixed rate for up to 25 years. Short-term rates are offered at 5, 10, and 15-year intervals.

Insurance and Taxes

Insurance and taxes are key factors in the costs of owning a home. Most mortgage payments can be calculated to include homeowners’ insurance, depending on the lender. Major banking partners require mortgage insurance if the down payment is low. 

Taxes are the property taxes governed by the province of Ontario. These can also be added to the regular mortgage payment amount. An over or underpayment is assessed each year once the property tax assessment is released by the province. 

Plan for Hidden Costs

Hidden costs with buying a home can involve an increase in mortgage payments, interest rates, changes to closing costs, inspections, title insurance, and zoning fees. Buying a home for a set price is the easy part; affording all of the potential unknown fees can be financially devastating. It is crucial to be aware of all buying, closing, and hidden costs that a transaction can include.

Navigate the Real Estate Market in a High-Interest Rate Climate with Zinati Kay

Don’t take chances as the Canadian interest rates increase! Talk to the experts at Zinati Kay – Real Estate Lawyers for help navigating the market. As a full residential real estate law office, we provide advice based on more than 25 years in the local real estate market. Call us today at (416) 321-8766 or email us at for more information.