The Bank of Canada (BoC) has been raising interest rates at the fastest and most significant pace since 1998. Here’s what the Bank of Canada’s interest rate hikes mean for homeowners.

The central bank started an aggressive campaign of interest rate increases in 2022, with the objective of cooling the inflation rate. While inflation has eased from its peak last summer, still sits above the Bank’s two-per-cent target, driven by a wide range of factors, from expansionary pandemic-era fiscal policy to surging commodity prices. Costs remain elevated across the board, from food and household goods to services. Can the institution achieve its objective of busting inflation and navigating the economy to a soft landing? Time will tell.

What is becoming evident, however, is that higher interest rates are weighing on the Canadian real estate market, impacting demand volumes and moderating price growth.

What the Bank of Canada’s Interest Rate Hikes Mean for Homeowners

In a survey of Canadians about the 2023 housing market, 45 per cent said they are concerned that interest rate increases will impact their ability to buy or sell a home this year.

Suffice it to say, borrowers are being affected by higher interest rates.

Indeed, a rising-rate environment reduces the purchasing power of prospective homeowners and increases the financial burden of current homeowners who have a mortgage. Add to this more stringent mortgage stress tests, and the number of homebuyers in the marketplace drops.

At the same time, homeowners who may have bought a home might have entered into a fixed-rate mortgage, which means they may not need to worry until about rising rates until their mortgage comes up for renewal in a few years.

“Homebuyers can often negotiate the interest rate for mortgage financing based on their creditworthiness and the degree to which they do other banking business with the mortgage lender,” the Canadian Real Estate Association (CREA) wrote.

It is estimated that a one-per-cent hike in rates will add hundreds of dollars to mortgage payments each month. However, for a considerable number of Canadians who are contending with soaring inflation and a slowing economy, even an extra $150 a month in mortgage payments can be unaffordable and affect their overall personal finances.

And this could have been the unintended consequence of near-zero interest rates that allowed homebuyers to borrow more than they could afford down the road.

“Some Canadians made decisions to take their mortgages out based on what they could be approved for and maybe didn’t get some financial advice to say, well, ‘I know I can get approved for a mortgage at this particular level, but what can I actually afford?’” said Lysa Fitzgerald, vice-president of sales at Manulife, in an interview with CBC.

Put simply, rising interest rates will impact mortgages across the country and weigh on the Canadian real estate market.

How Might Canadians Respond?

Many trends could form with anticipated interest rate increases.

The first is that homeowners may rush to sell their residential properties because they can no longer afford to carry the debt, especially if they were purchased at or near the top of the pandemic-era housing boom.

The second is that homeowners may be forced to refinance their mortgages.

Lastly, it could also lead to broader consequences for household budgets, such as spending less on groceries, leisure and entertainment, or the requirement to increase or supplement their income to help cover the higher mortgage costs.

If you’re planning to engage in the housing market, connect with a RE/MAX agent to help guide you through the ups, downs and uncertainties of the market.