How Rising Interest Rates Are Affecting Mortgages in Canada


Canada has one of the most oppressive housing markets in the world, despite the government’s attempt to cool the fire. According to reports, 2022 saw the worst decline in housing affordability nationwide in 27 years, and the high cost of inflation makes it difficult for Canadians to catch up.


Why are Interest Rates Currently High?

Most Canadians don’t pay attention to inflation because they’re experienced a stable inflation rate since 1991. Typically, inflation ranges between 1% to 3% and averages out at 2%. But food, gas, real estate, and other essentials now cost 6.8% more, while most non-necessities stay low.


Canadian banks are trying to raise inflation to where it would have been if the pandemic didn’t happen. To compensate for this rise, Canada is trying to raise interest rates until they get the target rate to a more “neutral” setting. It may take until the end of the year for this to happen.


How are High-Interest Rates Affecting The Market?

While Canada is doing what it can to reignite the housing market, they aren’t doing enough to make hot locals, like Toronto, affordable. Here’s what’s happening in the housing market.


Getting a House With 6-Figures is Nearly Impossible

The Canadian housing market has started to cool off since April 2022, but that doesn’t spell good news for the average Toronto resident. According to StatCan, the average household salary in Toronto is $51,500, but that’s way below what you need to afford a new home.


By using a mortgage calculator, we can see that someone in Toronto needs to make $228,100 a year to buy a non-condo home or make $150,000 a year to purchase a condo. Saving up for a down payment can reduce these costs, but it’s hard to save when inflation is so incredibly high.


Rent Prices are Cheaper Than Most Mortgage Payments

Buying a home or condo comes with many benefits, including cashing in on tax advantages and stability. You also don’t have to worry about the impact of fluctuations on the housing market. Fluctuations primarily affect the rental market, and when you rent, you’re throwing money away.


However, the housing market has become so expensive (an average house costs $800,000 in Canada) that you would need $40,000 to make a 5% down payment. Coupled with associated costs to own a home (maintenance, property tax, etc.), it’s cheaper to rent in the short term.


Variable Rate Mortgages Become Unaffordable

The cost of buying a home and paying it off is more expensive than ever, but what if you already own a home on a variable-rate mortgage? While your broker likely tried to take homeowners out of a variable mortgage, there were still several Canadians that have a flexible mortgage type.


That means that some Canadians may pay twice the amount in interest, which could make their homes unaffordable. If possible, these Canadians should switch to a fixed mortgage to prevent their home costs from rising higher. Or, they may have to sell before the market gets worse.


A Cooled Market Can Reduce Your Property’s Value

Rising mortgage rates are preventing many Canadians from buying a home, meaning most of them are opting out of the market altogether. This is a problem for homeowners looking to sell, as most of them are forced to mark down the price of their homes by 10% to 20% on average.


While the housing market will bounce back, as it always does, it leaves home buyers and sellers with little choice. Sellers either have to sell below market rate or hold on to their properties. At the same time, buyers have to forgo owning a home or attempt to save for a pricey home.

Leave A Reply