Toronto real estate gains have been driven largely by very low interest rates. While rates remained low, consumers felt comfortable borrowing more money to cover the rapidly rising costs of owning a home. With the economy in flux due to Covid and its impact on every aspect of the economy, the Bank of Canada (BOC) has kept interest rates low. Now, with inflation setting in, there is reason to expect rates to rise. In fact, strong voices such as Dave McKay, CEO of the Royal Bank of Canada are calling for rate increases this spring to mitigate the effects of inflation.
The effects of rising interest rates
While rising interest rates in Toronto can be a good thing – think better interest in savings accounts, it will make borrowing more expensive and affect how much house someone can afford. Rate increases will not immediately affect homeowners. Those who are locked into fixed rate mortgages will feel no difference until it is time to renew. At renewal, theoretically, their mortgage payment increase due to a higher interest rate will be offset by a smaller principal amount left to pay down.
Variable rate mortgages
Those with a variable rate mortgage, might consider locking it in unless they have a lot of flexibility financially. However, if you are already just making ends meet then locking in a lower interest rate is probably a good idea. Before making any financial moves, it is best to consult with your financial advisor or lender to understand your options and decided what is best for you.
Preparing for a rate hike
To prepare for eventual interest rate hikes it is best to pay down any loans as quickly as possible. If you have several loans, concentrate on paying down the highest rate loan first. You can also find out whether consolidating your loans makes sense for your situation. And, if you were planning on buying a home in 2022, then get a preapproved mortgage rate that will allow you to lock in the current very low rates.