A rate hike next year could change the math for anyone hoping to own a home. Despite the COVID-19 pandemic, the Bank of Canada saw a stronger-than-expected economic recovery. As a result, it was eyeing a rise in its lending rate in the second half of next year, 2022. So how does that affect your dream of home ownership?
This post was first published on April 22, 2021. It reflects the outlook at that time.
Why the Bank of Canada eyed a rate hike next year
A stronger economy usually means more spending and more borrowing. When that happens, prices across the economy can rise faster. To keep inflation in check, the Bank of Canada can raise its key rate. Then banks raise the rates they charge on loans and mortgages.
Variable-rate mortgages usually feel the change first, because their rate moves with the lender’s prime rate. Fixed rates follow a different path, since they track the bond market. Still, both tend to rise when the economy heats up. So every borrower has a reason to pay attention.
So is a rate hike next year good news for home buyers? The answer is yes and no. It depends on where you are in your journey and how ready you are to act. Let’s look at both sides.
Bad news for buyers who keep waiting
It is bad news for buyers who are still waiting to get into the real estate market. This includes first-time home owners and investors who have not made up their minds yet.
Why? Because if they wait until next year, they will likely pay higher rates than the historically low rates of today. In other words, the same home could cost more each month.
It is even more likely, as banks normally do, that lenders may increase their rates ahead of the BOC’s moves. They often do this in anticipation of a rate hike next year. So the higher bank rates may start to affect buyers even earlier than they expect.
For that reason, buyers who are ready should not assume they have plenty of time. A pre-approval with a rate hold can protect you for a period while you shop. Ask your lender how long their rate hold lasts.
Investors face the same pressure. A higher rate raises the carrying cost of a rental property. If rents do not rise at the same pace, the monthly numbers get tighter. So investors should test their plans at a higher rate before they buy.
Good news, with a catch, for first-time buyers
On the other hand, it is somewhat good news, especially for first-time home buyers. Higher rates may have some cooling effect on house prices. Prices had been climbing for over a year, and no other cooling effect seemed to be in sight.
But again, it is a double whammy. Buyers may be hoping for some slowing down in house prices, which may not come true because of many other factors. At the same time, a rate hike next year means they will be paying higher monthly payments.
Put simply, you could end up paying a similar price with a bigger payment. That is why timing the market is so hard. Instead, it is usually wiser to buy when your finances and your life are ready.
In Mississauga and across the GTA, many first-time buyers start with a condo or a townhouse. These homes can be a good first step while you build equity. Later, you can move up when your family and income grow. A clear plan matters more than a perfect guess about rates.
How a rate hike next year affects what you can borrow
Besides the monthly payment, affordability would also shrink. That is because of the debt ratios lenders calculate. They look at your earnings, your liabilities and the monthly payment you can afford. When rates rise, the same income supports a smaller mortgage.
Lenders also apply a stress test. You must qualify at a rate that is higher than your actual contract rate. So when rates climb, the qualifying bar climbs with them. Knowing this early helps you set a realistic price range.
Here are a few simple steps to prepare for a rate hike next year:
- Check your credit report and fix any errors early.
- Pay down high-interest debts, such as credit cards, before you apply.
- Get a pre-approval so you know your real budget.
- Build a cushion so a higher payment will not strain your family.
Does it all sound complicated? It does not have to be. For a step-by-step plan, read 10 essential steps for first-time home buyers in Mississauga. To see what happened when rates did rise, read about the Bank of Canada’s second increase on June 1, 2022.
Sources and further reading
To read the full Financial Post article, please follow the link:
Talk to a Mississauga real estate agent
Do you have questions about buying, selling or planning your next move? I am happy to help. You can reach me through my contact page or call me directly at 416 908 5600. A. Q. Mufti, Sales Representative, RE/MAX Real Estate Centre Inc., Brokerage.
Disclaimer: this article was published on 18 January 2025 and reflects the information available at that time. Interest rates, prices, and government programs change, so check the current position before acting on anything here. It is provided for information only and is not financial, mortgage, tax or legal advice. A. Q. Mufti is a registered Sales Representative with RE/MAX Real Estate Centre Inc., Brokerage, Ontario, Canada.
