The connection between the economy and the real estate market isn’t always clear. That said, it’s important for home buyers and sellers to have a basic understanding of what interest rates mean for their transactions. With increases on the horizon this year, now is a good time for a refresher.
In this post, we’ll take a closer look at interest rate increases—and what they mean for you…
What is the interest rate increase?
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.
At the beginning of the pandemic, the bank set its rate at just 0.25, a record low. Typically, when inflation is as high as it is now, we would expect that number to rise—but that’s not what’s happening.
Are you planning to sell a home? Here’s what you need to know about the current market:
- Will Interest Rates Cool The Hot Seller’s Market?
- Should I Try To Sell My Home As-Is?
- Should You Buy First Or Sell First In Toronto In 2022?
When is it happening?
On December 8th, Bank of Canada (BOC) announced that it would be holding its interest rate, not increasing it. That’s important because lenders tend to follow suit.
BOC stated that there are signs that inflation will be cooling down soon—so they likely won’t increase their rate until the middle quarters of 2022. This period spans from April through September.
While BOC’s statement covers several months, there are some possible indications that the first increase could occur sooner rather than later. According to a recent prediction from BMO (Bank of Montreal), a rate hike could be expected as early as April.
What does it mean for 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 the 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.
Are you currently locked into a fixed mortgage rate? If so, it may be higher when it’s time to renew, but it won’t impact you for the duration of your mortgage term. With a variable-rate mortgage, you’ll find that less of your money will go towards your interest than your principal.
If you have a variable-rate mortgage, you may want to talk to your lender about locking it in for a fixed term. If you can take this step, you may be able to enjoy the current rate.
Are you preparing to buy your dream home? To learn more about the process, read some of our buying resources.
- Your Guide to Buying a Home
- Home-Buying Conditions: Should You Include Them in Your Offer
- How Buyers Can Find Success in a Hot Seller’s Market
What does it mean for sellers?
When rates remain low, it often leads to a strong seller’s market. 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.
The bottom line
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 a home in 2022? Set up a buyer’s consultation right here. Gearing up to sell your property? Get in touch to schedule a seller’s consultation with our team!
