Update: As of September 7, 2022, the Bank of Canada’s target rate has risen to 3.25%.

For months, rumours have circulated that interest rates in Canada were about to rise. The ultra-low rate was meant to offset economic damage from the coronavirus pandemic, but it was never going to last forever. With the war in Ukraine and inflation rising, the government is under intense pressure to do something to try to get the cost of living back under control. 

One way to combat inflation is for the Bank of Canada to raise the target rate, which is what the banks pay to borrow money. When the target rate increases, the prime rate almost always follows. The prime rate is what the banks charge when they authorize a loan or line of credit. Last month, the real estate industry braced itself for an increase that didn’t happen. However, it was only a matter of time. Earlier this year, the Bank of Canada’s target rate increased from 0.25% to 0.50%. Then, on April 13, 2022, they announced a further rate increase of 50 basis points, totalling 1.0%.

How Will This New Rate Affect the Current Toronto Real Estate Market? 

Keep in mind, no one knows for sure what will happen. All we can do is make predictions based on the available information and how the housing market has behaved in the past. Some experts predict that the market will cool slightly as interest rates rise. Others believe that there will be little to no effect because there are so many people looking to buy a house and few willing to sell. 

Here is what we know so far: Low interest rates caused a frenzy in the real estate market. We were already in a strong seller’s market, but the ability to borrow money inexpensively made buyers even more eager. As a result, housing prices skyrocketed, but the demand never slowed down. With the increased interest rate, some first-time buyers will simply not be able to qualify for a mortgage and will get pushed out of the market. However, buyers aren’t the only ones who will be affected. 

Life is about to get a little more expensive for anyone whose mortgage is coming up for refinancing. For every 0.25% increase to the target rate, you can expect to add $12 to $13 for every $100,000 on your mortgage. It may not sound like much, but it adds up quickly, especially when considering the average price of $1.7 million for a detached house in Toronto. An already cash-strapped homeowner may struggle when their monthly payment increases by $130 or more. 

Will More People Start Selling Houses in Toronto?

A higher prime rate may cause more people to put their houses up for sale as their mortgage payments become unmanageable. It’s unlikely to topple the seller’s market entirely, but it may balance the scales more between buyers and sellers. As a result, sellers may begin to see fewer bidding wars and lower prices as buyers have more inventory to choose from. 

Whether the recent increase to the target rate will be enough to affect the market remains to be seen. However, that was just the beginning, and we can expect to see several hikes in the next twelve months. By the end of the year, we could be looking at a target rate of 2.0%

What Interest Rates Might Mean for Sellers

The first few changes to the target rate may not have a noticeable effect on the Toronto Real Estate market. Later on, housing prices may start to drop in value. Buyers will not be able or willing to pay as much because they’ll have more interest on their loans. However, this isn’t happening in the next few months because the demand for homes in Toronto is still very high. What does this mean? If you list your house, you will still command top-dollar for it, and it will still sell quickly as buyers try to get ahead of further interest hikes. But it doesn’t mean you can become complacent. It’s more important than ever to prepare and market your home if you want to maximize your sale.

Want to sell your house while the market is still hot? These articles are a great place to start:

• How to Prepare Your Home to Appeal to Millennial Buyers
• How to Prepare Your High-End Toronto Condo for a Successful Sale
• Five Factors to Maximize Your Home Sale in Today’s Market

What Rising Interest Rates May Mean for Buyers

In the short term, houses in Toronto are likely to become even more expensive to buy because of the increased interest charges on your mortgage. Eventually, however, there may be a moderating effect as many buyers will be priced out of the market altogether. When the competition decreases, prices will usually go down. If that happens, we will start to see more houses available for sale. 

Part of the reason there are so few listings right now is many current homeowners are afraid to sell for fear of not knowing if they’ll be able to find somewhere else to live. If more people start selling, and more new homes and condos are being built, it will be easier for those who want to downsize or move to put their house on the market.

Competition in Toronto will always be high, so drastic decreases in housing prices are unlikely. However, buyers who have the funds available may start to see more options as the market balances out. 

Buying a home in Toronto is always challenging, especially during a seller’s market. Here are some resources to help you succeed: 

• How to Succeed With a Strategic Home Buying Process
• Our Top Five Central Toronto Neighbourhoods for Young Professionals
• Are You Ready for a Major Real Estate Investment?

Recent Success Stories

Despite these changes, our team has been able to incorporate new strategies with our existing expertise to ensure positive outcomes for sellers in the luxury market. Here are two recent sales from Armin Group where our clients enjoyed great success.

14 Divadale Drive | North Leaside | Asking Price: $ 2,798,999

364 Lippincott Street | The Annex | Asking Price: $ 3,395,800

As proven experts in Toronto Real Estate, we can ensure the successful sale of your home regardless of interest rate changes. Contact us.