Today, the Bank of Canada announced its third rate increase of the year. Interest rates have increased again by 50 basis points to 1.5%. This is in an effort to tame inflation which is at its highest in decades. Rising interest rates also have a significant impact on lending across the country. So what is the best way forward for prospective home buyers as the cost to borrow climbs?
In its press release, the Bank of Canada cautioned “the risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.” This decision was widely expected by economists and many people that are currently active in the market, or planning to be this summer, have prepared for this.
However, interest rates are expected to continue rising this year as inflation is growing faster than originally forecasted. The good news for buyers is that as interest rates have been rising steadily this year, the housing market is cooling and entering balanced market territory. We are starting to see significant declines in home prices. Lower prices are meaningful for those trying to get onto the property ladder as they may find their qualifying borrowing capacity limited with increased mortgage rates.
Four Tips for Buying a Home While Interest Rates are Rising
1. Don’t try to time the market
The housing market is always changing, and buyers and sellers should remember the non-financial factors when making the decision to enter the market. If you need to upsize, downsize, or have secured a down payment and are ready to make the move; don’t put off the decision with hopes that you’ll get a better deal next month or next year. One will only know the market has hit bottom when the prices go up again and the opportunity to buy at that price is gone.
2. Be willing to adjust your budget as needed
When interest rates are lower, buyers are often able to secure larger loans meaning they can afford a higher-priced home. Now that interest rates are rising, work with your real estate agent to understand what you can afford in today’s market. As we are entering a balanced market, listing prices are coming down, so you may be pleasantly surprised with what your dollar can buy you.
If you haven’t found that dream property but you are actively looking, securing your pre-approval now is also helpful to lock in at a lower rate before the Bank of Canada makes further adjustments this year. Most pre-approvals are good for four months which might just get you through future rate increases.
3. Review all your loan options
A shorter term loan, such as 15 or 20 years often comes with a lower interest rate compared to 30-year rates, as well as variable rates which are often lower than fixed-rate mortgages. “Anyone who is risk-averse should only consider a fixed-rate mortgage,” explained CEO at CanWise Financial, James Laird. “Canadians who are open to a little more risk and have financial flexibility in their household should still consider a variable rate, since they currently remain about 2 per cent lower than the fixed rates you can get today.” Discuss your options with your real estate agent and your mortgage broker so you can make the most informed decision.
4. Be open to surrounding markets and home types
There are many markets in Southwestern Ontario that can offer a great deal for buyers and sellers alike. In the April Canadian Real Estate Association report, we saw home prices decline in many key markets by 3.0% to almost 6.0% including Milton, London, and Cambridge. If you have the flexibility, make sure to look at a variety of cities and compare your options.
Alternatively, if you are set on a certain neighbourhood or city, looking at a variety of home type options might help your budget go further. Home prices declined in April 2022 across townhomes the most, down in Toronto by -2.7% month-over-month in April, and -7.6% in the GTA.
For more tips, download our free buyer’s guide and contact a Zoocasa agent today.
