With interest rates on the rise and home sales in many cities across the country slowing, house hunters have a lot to think through as they search for a new home.
After watching as house prices skyrocketed in many parts of the country over the course of the pandemic, house hunters are now confronting a situation where prices are falling in many cities, while at the same time the cost of borrowing is going up.
In July, the Bank of Canada raised its policy interest rate by 100 basis points – or 1% – in an effort to combat rising inflation. It was the Bank of Canada's fourth consecutive interest rate increase since March of 2022. In September, the Bank of Canada announced another rate increase.
Because this central bank's policy interest rate has an impact on the rate at which Canadian banks will lend money to businesses and individuals, the rate increase affects the TD Mortgage Prime Rate, which is the variable annual interest rate used as a reference by TD to determine the interest rate charged on its mortgages.
What this means for those Canadians looking to buy a home is that when they are applying for a TD mortgage, they likely won't see the low mortgage interest rates that have been common for the past several years. This means that even if the price of housing may be going down, house hunters might not be able to qualify for mortgage amounts quite as large as they might have been able to in the past.
The impact of changing interest rate on house hunters
According to Marco Torto, District Manager and Mobile Mortgage Specialist at TD, if you're going to need a mortgage to buy your home, one of the key decisions you will need to make is whether to go with a fixed or variable interest rate. You will need to decide which one works for your lifestyle and how comfortable you are with the fact that, with a variable interest rate, the rate could change during the term of the mortgage.
(To learn more about the differences between fixed and variable rate mortgages, please consult this TD Stories article here.)
A fixed interest rate means the interest rate is "fixed" for the mortgage term, so the rate won't change during the term, and neither will the amount of your mortgage payments of principal and interest. In an environment where interest rates are rising, some customers may prefer a fixed rate mortgage to ensure they know exactly how much their mortgage payment will be for the duration of their mortgage term, especially if they're worried about further interest rate hikes.
With a variable interest rate mortgage, the interest rate has the potential to fluctuate during the term of the mortgage. At TD, the total amount of the mortgage payment will stay the same for the term, but if the TD Mortgage Prime Rate goes down (and therefore a customer's variable rate goes down), more of the customer's mortgage payment will go towards the principal. If the TD Mortgage Prime Rate goes up (and therefore a customer's variable rate goes up), more of the customer's mortgage payment will go towards interest.
Feeling overwhelmed? You're not alone
According to Torto's recent conversations with potential home buyers, if you are in the process of buying a home and are feeling overwhelmed, you're not alone.
"Over the last few months, we've seen an influx of questions from potential homebuyers, particularly around how rising interest rates could impact what they could afford," Torto said.
"Earlier in the year, house hunters were chomping at the bit to buy homes for fear of missing out, but we're now seeing many people sitting on the sidelines re-evaluating their next move."
Torto said that Canadians looking to buy a home need to let go of the idea that there is a "perfect" time to buy a home, and instead focus on the right timing for themselves and their family.
"In my experience, the idea that there's a perfect time to buy is really unfounded," Torto said. "Everyone's situation is so different. We're all at different stages of our lives, our careers and our relationships, and those can affect the requirements for what we are looking for in a house, and when we are able to make a move. But one area where customers do have control is the length of the mortgage term they choose. For example, if a person thinks it is important to have the flexibility to change their mortgage payment options more often than every 5 years with a traditional mortgage term, they might want to consider a mortgage term of less than a traditional five-year term."
Be prepared to adjust your budget
Torto suggests that whether you're a first-time homebuyer or looking to upgrade from your current home, you've likely been doing some house hunting for quite some time.
However, the fact is the housing market has likely changed quite a bit if you began your search as far back as late 2021. Beginning in early 2022, the Bank of Canada began raising interest rates, with the benchmark interest rate going from 0.25% at the beginning of the year to 2.5% in July of 2022.
At the same time, according to the Canadian Real Estate Association, the number of homes sold in Canada fell by 5.3% in July of 2022 alone, while the national average sale price fell 5% year-over-year.
If you didn't take these two changes into account in your house-hunting search, you may fall into one of two categories: either you are looking at homes you can no longer afford due to the interest rate increases by the Bank of Canada or you might be ignoring homes that are now within your budget due to the drop in housing prices.
To help you search homes that fit your budget, check out the TD Mortgage Affordability Calculator or consider meeting with a TD mortgage specialist to help get a clear picture of what you can afford now and which mortgage term and rate would best suit your needs.
Lock in a rate
If you're looking to buy a home soon, getting a mortgage pre-approval can be a useful tool, especially if rates continue to trend upwards, Torto said.
"One of the most important things I advise prospective buyers about is getting a mortgage pre-approval," Torto said.
Fixed rate mortgage pre-approvals at TD come with an interest rate that is valid for 120 days – which means that the fixed rate quoted is the one which will apply for that time period, even if rates increase while you're house hunting.
If your mortgage pre-approval is for a variable interest rate, you receive a discount of a certain percentage that remains valid for 120 days and will be applied to the TD Mortgage Prime Rate that will be in effect at the time of your purchase. . To learn more about the TD Mortgage Prime rate, please visit this page on TD.com.
If rates should rise during the 120 day period of your pre-approval, TD will honour the fixed interest rate quoted on your pre-approval, or if your pre-approval is for a variable rate mortgage, TD will honour the percentage discount stated in your pre-approval. . This way you can breathe a little easier knowing that your fixed rate won't increase or that your variable rate discount will remain intact, for the 120 days while you're looking to find your dream home.
Pre-approvals are free and there is no obligation to use the full pre-approved amount. If you want to take a little longer to search for the perfect home or if the home shopping process takes longer than expected, you can easily apply for a new 120-day pre-approval.
In the current quickly evolving rate environment, applying for a mortgage pre-approval can help provide you with some stability surrounding your mortgage interest rate and also give you a clearer picture of the home price amount you can afford, Torto said.
To learn more about mortgage pre-approvals or to apply online, visit TD Mortgage Pre-Approval.