Mortgage Rates in Canada: How to Navigate the Canadian Housing Market

The landscape of mortgage rates in Canada has undergone significant changes in recent years, leading to a mix of opportunities and challenges for homeowners and prospective buyers. With millions of mortgages in Canada set to renew in the next three years, many Canadians will face higher interest rates once their current term is up - creating concern and putting pressure on families across the country. This blog aims to provide an overview of these changing interest rates, their implications, and the financial support tools available to help Canadians through a period of uncertainty.

The Evolution of Mortgage Rates in Canada

Over the past 40 years, mortgage rates in Canada have seen dramatic shifts. In the early 1980s, they soared above 20% due to high inflation and economic recession​​. Rates gradually declined in the 1990s, stabilizing around 7-9% as the economy improved​​. The 2000s brought further reductions, with rates dropping to around 5-6%. During the 2010s, rates fell to historic lows, dipping below 2% amid the COVID-19 pandemic​​. 

The low rates experienced during the pandemic created what was labelled as a buyer’s market and ultimately led to a surge in home purchases. While lower rates allowed many Canadians to become homeowners, they may have also created somewhat of a false sense of security. As a means to combat rising inflation, the Bank of Canada has since raised the key interest rate - doing so ten times between March 2022 to July 2023, bringing the rate to 5%. However, on May 6, the Bank of Canada announced a 0.25% cut to the key interest rate, bringing it to 4.75%.
This marked the first time the key interest rate had been cut in over four years, potentially indicating the start of a rate-cutting cycle. 

The Financial Impact on Homeowners

Changes to interest rates can have a significant impact on mortgage payments and personal finances - forcing many homeowners to evaluate their household budgets and determine their financial flexibility. 

If the prime interest rate in Canada rises, homeowners with variable-rate mortgages will see less of their payment go toward paying the principal amount and more to paying off interest - which can result in extended amortization periods and paying more in the long run. This may also lead to increased mortgage payments at renewal.

Additionally, an increase of just a few percentage points can escalate payments for Canadians who have fixed-rate mortgages. Depending on the interest rate when a home was purchased and the amount remaining on the mortgage, those with a fixed-rate mortgage could see their monthly payments increase by more than $1,000.

With this reality, homeowners are now faced with tough decisions such as selling their homes, renting out their properties, or downsizing to more affordable living options. Staying on top of mortgage payments can be difficult when facing financial hardship, making it more crucial than ever to live within one’s means. 

When assessing one’s ability to manage mortgage payments, it’s imperative to consider a variety of other expenses. This includes property taxes, home insurance, maintenance and repair costs, and utility expenses including water, electricity, and heating. Properly accounting for these costs and cutting back on other purchases is pivotal in determining whether continuing down the road of homeownership is feasible for your situation. 

Challenges and Considerations for Aspiring Homeowners

The surge in interest rates in Canada, coupled with the rising value of Canadian real estate, presents significant hurdles for aspiring homeowners. What once seemed like an attainable dream now feels somewhat out of reach. That said, while the market has experienced changes, owning a home in Canada is still possible and can be achieved with the proper planning.

Buying a home can be a good investment, offering the potential for property value appreciation and the benefit of building equity over time. Homeownership also provides stability and the freedom to personalize your space without restrictions from a landlord. Just remember, buying a home requires a significant upfront investment for the down payment, closing costs, and ongoing maintenance expenses. 

As an alternative, renting offers flexibility and lower upfront costs. Renters are not responsible for property taxes, maintenance, or repairs, which can save both time and create an opportunity to accumulate funds that will one day go towards purchasing a home. Renting also provides the freedom to relocate more easily, which can be advantageous for those with uncertain job prospects or those who anticipate needing to move in the near future.

Receive the Best Advice for Life’s Biggest Decisions

Making the decision to sell your home, downsize to a smaller property, or rent a house requires much thought. In a world filled with varying opinions, we recognize the importance and value of providing our clients with helpful advice - which is why we are proud partners of Rocket Mortgage. 

Whether you are renewing a mortgage, looking to buy your first home, wanting to explore refinancing options, or wondering what changing interest rates mean for your mortgage, their team can offer insights into the best strategies to help you navigate the Canadian housing market. Complete this form to be referred directly to the Rocket Mortgage team. 

For advice on other major life and financial decisions, a BIG broker will take the time to understand your situation and goals and work with a number of insurance partners to find the best solution for your needs. While these situations might feel daunting, the guidance you receive will help you make informed decisions and give you peace of mind as you secure your financial future.