What a rate hike means for the housing market

Spring is usually peak season in the real estate market, and that may be especially true this year as buyers move quickly to take advantage of current low interest rates before they go up. “What we are seeing now is another sense of urgency because people are realizing that the window is closing,” Tal says. With an interest rate hike motivating people to push up their home purchases earlier in the year, it creates a dynamic of “borrowing activity from the future,” Tal says, adding that this year’s market will be more front-loaded than usual. “I think that in the second half of the year the housing market will probably slow down a little bit given the fact that the future has arrived, if you wish. It doesn’t mean that the housing market will be weak. It simply will soften from an unsustainable level of activity.”

Although interest rates are on their way up, they still have some way to go before they reach pre-pandemic levels. That’s especially true if you’re renewing a typical 5-year fixed-rate mortgage, Tal says. “When was the last time mortgage rates were high? Exactly 5 years ago. In 2017 and 2018 when the Bank of Canada was raising interest rates as well, which means that people that are renewing their mortgages now are renewing at a lower level. And even if the Bank of Canada raises interest rates over the next year, you have about 100 basis points immunity.”

If your mortgage term is ending in the next year, you might be eager to lock in a low rate by renewing your mortgage. It’s a good idea to start the conversation with an advisor now. You may qualify to renew your mortgage as early as 150 days before the end of your term. You could possibly have pre-payment charges or other fees waived too.

Are you buying your first home Opens in a new window.? Are you thinking about your next property? It’s important to consider not only what your monthly payments will be at the current interest rate, but also what you can afford if rates go up. With the average size of a new mortgage having reached $450,000, a 1 per cent increase in mortgage rates would cost an average new buyer $230 more in additional monthly interest payments. To help you crunch numbers, use our mortgage affordability calculator. An advisor can also help you explore different options for your unique situation.

“My best advice is to take a close look at your budget. We have seen extremely low mortgage rates in the past 2 years, but we know rates are already on their way up,” says CIBC Mortgage Advisor Jacson Francois. “My approach is to do a few scenarios to show the clients what their monthly payment would be in the current rate environment and then what it could be if rates go up. This can help them decide on the property value and mortgage amount they should apply for.”

If you currently have a mortgage, consider increasing your monthly payment to what it may be when your mortgage rate goes up. That way you’re used to budgeting for that amount and don’t have to make as big an adjustment when the day comes to renew your mortgage. You’ll also have the benefit of paying more down directly on the principal amount, which can help you pay off your mortgage faster. “Take advantage of those low interest rates that you are benefitting from now and accelerate your payments to build more equity and reduce your interest,” Tal says.

There has been a lot of speculation about the potential for a Canadian housing bubble, but Tal points out that the market is following the predictable rules of supply and demand. “Despite the huge increase in prices, the fundamentals of the market are relatively strong because of the lack of supply,” he says. “Even if you have some sort of a correction in the market due to a recession there is a bottom to prices because of those fundamentals.”

This article was written using findings from an interview on March 16, 2022. If you have questions about the current market, please connect with your advisor.