Rising Interest Rates in Canada

In June 2022, the Bank of Canada increased interest rates from 1% to 1.5%. This represents the largest jump in interest rates so far in 2022. Interest rates have been steadily rising since February with further hikes expected for the remainder of the year.

Projected Interest Rate Trends

Interest rates are projected to continue increasing. Because inflation rates are continuing to increase, it’s expected that interest rates will also continue to rise.

The official inflation rate in Canada as of April 2022 sat to new 31-year high of 6.8%, which marks a slight increase from March 2022 when the inflation rate was at 6.7%. Although inflation was predicted to have peaked in March, it did not reduce as was expected to in April. Current BoC predictions expect inflation to continue rising before reaching a peak later in 2022 or early 2023. To address the increased inflation rates, the Bank of Canada is following a quantitative tightening plan. As long as inflation is rising, it’s likely that interest rates will also rise to counteract some of the consequences of high inflation.

How to Deal with Rising Interest Rates

With interest rates on the rise again, how should homeowners, homebuyers, and real estate investors interact with the real estate market? The right response to rising interest rates will vary depending on your position in the market right now.

Holding a property

Property owners are not as heavily affected by rising interest rates as those trying to enter or exit the market. The exception to this is any property owners with adjustable-rate mortgages, they should pay close attention and lock in their rates.

When interest rates are high, mortgage rates also increase. Your mortgage interest rate will increase as the BoC increases interest rates. If you can do so, it could be beneficial to pay down as much of your mortgage as possible at its current rate before the interest rate continues to increase, eating up a big chunk of your monthly principal & interest payments.

Making New Purchases 

The real estate market in Canada has been red-hot for past several years, and that’s not expected to change in 2022. While the inflation threat will likely cause home prices to fall, this may not actually help with home affordability for most Canadian homebuyers. In fact, affordability is projected to get worse throughout 2022 as interest rates increase. As the economy deals with high inflation, cost of living also increases, which may impact your ability to afford a mortgage in the long-term.

Prices usually go down because mortgage rates are increasing. While the price of the property itself may reduce, the mortgage itself will have a higher interest rate. The actual cost of the mortgage itself will vary based on the applicant and mortgage type.

In the long-term, home prices may begin to fall as mortgage rates continue to rise. However, this is not likely to provide a visible benefit for new homebuyers in the short-term. Over 2022, property prices may continue to increase, particularly in hot Canadian markets with consistently high demand.

If you’re looking to acquire a commercial property under these conditions, make sure to scrutinize the deal more closely and look for value-add opportunities that could compensate for the higher risk.

Income-Generating Properties

Those who own cashflow producing investment properties are in the strongest position when interest rates are on the rise due to inflation. Since the value of the property is tied to its cash flow, the property value can remain strong or even increase if the rents are increasing.

Cashflow producing properties often outperform other assets during times of high inflation and rising interest rates. Inflation pushes real estate prices upward, including the rents. The housing development projects usually slows down and demand for existing properties rises, occupancy rates usually skyrocket. In these environments, landlords will typically raise rents, which will in return generate higher revenues and increases property value.

If you’re looking for more information on weathering the storm of rising interest rates, contact us today. Creiland Consultants Realty is a full-service commercial real estate advisory firm based in Toronto, Ontario, that’s ready to help.