Real Estate

Understanding the Impact of the Latest Mortgage Interest Rate Changes in Canada

Understanding the Impact of the Latest Mortgage Interest Rate Changes in Canada
Written by
  • Ashley Howard
| 6 October 2023
Reviewed, 23 October 2023

Table of contents

    The Canadian housing market has seen its fair share of fluctuations in recent years, and one of the key contributors influencing homeownership is mortgage interest rates. Mortgage interest rates play a vital role in determining homeownership’s affordability and overall cost. Any changes in these rates can immensely impact Canadian homeowners.

    In this blog post, we will go into the recent changes in mortgage interest rates in Canada, explore the factors influencing these changes, and provide practical tips for homeowners to make informed mortgage decisions.

    Key Takeaways

    • Mortgage interest rates are a fee a lender (mortgagee) charges a borrower (mortgagor) as compensation for borrowing funds (capital) to purchase a home. 
    • Variable interest rates are influenced by the Bank of Canada’s policy rate decisions, and fixed interest rates by bond yields. 
    • The recent increases in mortgage rates are impacting home affordability, real estate prices, demand, and more.

    Understanding Mortgage Interest Rates

    Mortgage interest rates refer to the percentage that borrowers pay to lenders as compensation for borrowing money. 

    These rates are influenced either by the Bank of Canada’s (BoC) policy rate (variable interest rates) or bond yields (fixed interest rates). Lenders and banks will set a discount or markup on their prime rate, typically 2.20% higher than the BoC’s policy rate. Lenders and banks will add a markup to the corresponding bond yield to price their fixed mortgage rates.

    Every individual’s personal financial situation, like their credit score, loan-to-value ratio (LTV), and down payment, will also influence the interest rate you are offered. 

    There are two common mortgage rates in Canada: 

    • Variable. Variable interest rates throughout the country are tied to the BoC policy rate. When this rate increases or decreases, lenders and banks will follow suit, changing their prime rate in line with changes to the policy rate. Most banks and lenders keep their prime rate 2.20% higher than the BoC policy rate. 
    • Fixed. Fixed interest rates are tied to their corresponding bond yield. This means that 5-year bond yields will influence 5-year mortgage interest rates. When these bond yields increase or decrease, fixed mortgage rates tend to follow shortly after. Most banks and lenders will price fixed interest rates 1-2% higher than the corresponding bond yield to compensate themselves for the cost of origination. 

    Factors Influencing Mortgage Interest Rates

    Many factors influence mortgage interest rates. Curious about what they are? We break it all down below. 

    Economic Conditions: 

    Mortgage interest rates in Canada are influenced by inflation, employment data, GDP growth, and the Bank of Canada’s monetary policy decisions. When the economy is strong and growing, interest rates tend to rise to curb inflation. Interest rates are lowered during economic downturns to stimulate borrowing and spending.

    Global Market Trends: 

    Canada’s mortgage rates are also influenced by global market trends, particularly those in the United States. The Canadian economy is closely linked to the U.S. economy, and changes in U.S. interest rates can have a ripple effect on Canadian rates, preventing the Canadian dollar from further devaluing against the greenback.

    Bond Yields:

    Fixed mortgage rates are closely tied to bond yields. When bond yields rise, mortgage rates tend to follow suit. Bond yields reflect the returns investors receive on government bonds, which are influenced by investor sentiment, inflation expectations, and central bank policies. 

    Recent Changes in Mortgage Interest Rates

    Over the past year, the Canadian housing market has experienced several changes in mortgage interest rates. What was a historical low of 0.25% during the height of the pandemic now stands at 5%, a rate not seen since 2001. Of course, these recent mortgage interest rate changes have impacted many average homeowners. 

    A Few Core Impacts on Canadian Homeowners From Rate Hikes: 

    • Affordability: Changes in mortgage interest rates directly affect the affordability of homeownership. When rates rise, variable mortgage payments increase, making it more challenging for homeowners to meet their obligations. Note: Those with a fixed rate may have dodged a bullet for now, but they should shop around for a low fixed rate as they will be faced with higher interest rates on renewal. 
    • Mortgage Demand: As interest rates rise, qualifying for a mortgage becomes much harder. To get a mortgage, homeowners must meet the stress test requirements of 5.25% or your mortgage contract rate plus 2%, whichever is higher. This has reduced the number of borrowers who can qualify for a mortgage, reducing demand and putting homeownership out of reach for many Canadians. 
    • Real Estate Market: The real estate market has seen a slight drop in prices in response to increasing mortgage rates. Sales are slowing while new listings are returning to normal levels.  

    Navigating the Shifting Landscape

    The shift to higher interest rates has put more pressure on the market, eroding purchasing power and making qualifying for a mortgage much more difficult. There are a few tricks to navigate the current environment. 

    Review the Mortgage Contract 

    First-time buyers and homeowners should review their mortgage contracts to understand all terms and conditions, including prepayment penalties, renewal dates, interest rates, and prepayment options. This knowledge will enable homeowners to make the best mortgage decisions before committing to the term.

    Set Realistic Goals

    Assess different financial situations and set realistic goals based on short and long-term plans. Understanding the impact of potential interest rate changes in the next few years can help determine the affordability of mortgage payments and help plan accordingly for any increases.

    Prioritize Finances

    Homeowners coming up for renewal should prioritize their finances and consider taking advantage of prepayment privileges to help offset some of the costs of higher mortgage rates. By doing so, homeowners can reduce their overall interest costs and pay off their mortgages sooner.

    Did you know? By simply switching mortgage payments from monthly to accelerated biweekly, homeowners can reduce their mortgage by more than 3 years on a 30-year amortization, saving themselves thousands of dollars in interest.

    Shop Around For a Low Rate 

    Before committing, first-time homebuyers (FTHB) and homeowners up for renewal should shop around for the best interest rate and terms. Discuss options with a mortgage expert from Compare Mortgages who could help you secure the lowest and best rates in the market. 

    Frequently Asked Questions

    How does the Bank of Canada’s interest rate decision impact the housing market?

    When the BoC decides to increase interest rates, this can negatively impact the housing market as it becomes more expensive to borrow money and more challenging to qualify for a  mortgage. This can lead to home prices falling as fewer people can enter the housing market. 

    When the BoC lowers interest rates, this can positively impact the housing market. When interest rates decrease, it is easier to qualify for a mortgage, making borrowing money less expensive. This can lead to home prices increasing as demand picks up.

    How does the Bank of Canada’s benchmark interest rate impact economic growth?

    When the BoC increases interest rates, this higher cost of borrowing can negatively weigh on economic activity and suppress economic growth. When interest rates decrease, the lower cost of borrowing can positively influence economic activity and stimulate economic growth.

    How will future interest rate decisions impact individuals’ mortgage payments?

    If you have a variable-rate mortgage, any future interest rate decisions will directly impact your mortgage and, depending on the type of variable mortgage, the payments you make. If the BoC decides to increase interest rates, your interest rate will also increase. If they decide to decrease rates, your interest rate will decrease. If rates are held steady, then your interest rate will remain unchanged.

    Final Thoughts 

    The Bank of Canada’s decision to hold its key interest rate steady has significant implications for the Canadian economy and individuals. While borrowers with variable-rate mortgages may benefit from the pause in rate hikes, there are still uncertainties and potential future increases to consider. 

    Individuals should carefully evaluate their financial situation, monitor economic indicators, and seek professional advice to effectively navigate the evolving economic landscape. 

    By staying informed and proactive, individuals can make sound financial decisions and prepare for potential changes in the interest rate environment.

    You should lock in a low rate with a lender today! Compare rates and find a fit now.