Rate hike adds another hurdle to Toronto's sluggish housing market

For homeowners approaching mortgage renewal and buyers deciding whether to enter the market, the increase adds another layer of uncertainty at a time when household budgets are already under pressure.

Ross McCredie, chief executive and chairman of Sutton Group, explained the housing market is simultaneously being hit by a difficult economy, a weak dollar, rising interest rates, and a trade dispute with the United States.

“It’s like whiplash for Canadian homeowners and they don’t know what to do,” he said. “For people looking at buying or selling homes, they’re just kind of exhausted with trying to figure this out.”

What the rate hike means for mortgage payments

The central bank’s move will push up lenders’ prime rates, directly affecting variable-rate mortgages, but the impact on fixed-rate mortgages is less straightforward.

For a borrower with a $500,000 variable-rate mortgage, Wednesday’s increase could add roughly $67 to monthly payments if the mortgage’s interest rate rises by a quarter of a percentage point, said Neil Drepaul, a broker and director at Canadian Mortgage Services. The exact change depends on the mortgage’s terms and how the lender structures payments.

“For existing homeowners, if you have a variable-rate mortgage, you are immediately impacted by this,” Drepaul said.

Clay Jarvis, a mortgage expert at Ratehub.ca, said the lowest five-year variable rate could rise from 3.45 per cent to 3.70 per cent following the announcement.

The lowest advertised five-year fixed mortgage rate was 4.34 per cent as of Tuesday, according to Ratehub.ca, while the lowest variable rate was 3.43 per cent.

“Both fixed and variable rates could rise further this year,” Jarvis said, advising homebuyers and homeowners approaching renewal to consider getting a mortgage pre-approval.

Borrowing costs for fixed rates, which are influenced by government bond yields and can change independently of the central bank’s decisions, have already risen in recent weeks as bond yields climbed and in anticipation of Wednesday’s announcement.

Some borrowers who moved quickly to lock in a fixed rate may now be committing to a higher rate than the one on their current variable mortgage, Drepaul said.

What it means for the housing market

The increase comes as buyers and sellers grapple with high housing costs and uncertainty about the economy.

McCredie said the rate hike is only one of several factors affecting the market, and he does not expect it to significantly change sales volumes on its own.

Drepaul, likewise, said the increase alone is unlikely to trigger a dramatic shift, though the prospect of further hikes could weigh on buyers’ confidence. 

“There’s just so much happening geopolitically that makes it feel worse, but I don’t think it’s as bad as it was a few years ago, not from an interest rate perspective,” Drepaul said. “It’s not time to panic.”

However, Rishard Rameez, founder and chief executive of real estate platform Zown, said the hike could prolong the housing market’s recovery, as prospective buyers who have been waiting for borrowing costs to fall could be discouraged from purchasing a home.

Even if home prices fall further, he said higher mortgage rates can reduce the amount buyers qualify to borrow, potentially forcing them to look at less expensive properties or delay their plans.

“Home ownership should not come at the cost of the quality of life,” he said, advising prospective buyers to consider whether they could manage their mortgage if rates rose further or a household member lost their job.

In a survey released Wednesday by Zown in partnership with Angus Reid, 40 per cent of Canadians said they had dipped into long-term savings in the past year to cover everyday expenses, including groceries, rent and mortgage payments. Among those who had drawn on their savings, 13 per cent said the money went toward mortgage or rent payments.

Meanwhile, Canada Mortgage and Housing Corp. said in its fall residential mortgage report, released Tuesday, that mortgage delinquency rates are expected to rise in Ontario, B.C. and Atlantic Canada through mid-2027, with Ontario projected to see the largest increase.

The Bank of Canada has said further increases may be needed if inflation remains elevated, while stressing that future decisions will depend on how the economy evolves.