If you're looking to buy or refinance, the lower the interest rate on your mortgage, the better. And the Bank of Canada has lowered the overnight interest rate (what banks use to determine mortgage rates) pretty dramatically since COVID started. In fact, the interest rate on the 5-year-fixed mortgage is the lowest it’s been in history. It has literally never been cheaper to borrow.
So how does the Bank of Canada prime rate impact Joe Homebuyer, especially in Toronto?
Lower rates ensure more people can afford to buy, which contributes to a stable economy amidst the economic fallout of the pandemic. And we've definitely seen their impact on the Toronto market, particularly with houses. The demand is up and, as a result, so are the prices.
How does the Bank of Canada influence rates – and why?
Before we start exploring how those rates impact Toronto real estate, let’s spend a little time on some “Bank of Canada basics.”
As our central bank, the Bank of Canada promotes and protects the country’s economic well-being. One way they do that is by setting a monetary policy, which contributes to economic performance by keeping inflation low, stable and predictable. By raising or lowering the overnight rate (the interest rate at which financial institutions borrow and lend one-day funds themselves...hence the term “overnight”), they influence other market interest rates – including mortgage rates.
The Bank of Canada doesn't set mortgage rates: lenders do, and they’re in the game to make a profit. So while their numbers are based on the posted rate, there are a lot of other factors involved, too, including their operating costs, what they pay to borrow the money, and the level of risk they're taking by lending it to you.
But the Bank of Canada isn't the only factor that influences interest rates.
They are determined by the state of the economy, in Canada and internationally. The world's financial markets are all connected, and our rates fluctuate in response to what's going on in other countries – especially our neighbour to the south.
When markets and economies are strong, interest rates go up: more companies want to borrow to expand their businesses, driving up demand. But weak growth makes businesses risk-averse, and when demand drops, so do interest rates.
The Bank of Canada's role in all of this isn't to control, but to stabilize big fluctuations and keep the economy healthy and on an even keel. Their goal is to keep inflation at a relatively steady 2%. So when the economy is going strong, they may raise the overnight rate to keep it from going too much over that 2% threshold. And if the economy isn't doing as well, they adjust so it doesn't fall too low.
How falling rates boost your buying power
Because of the mortgage stress test, you still have to qualify at a higher rate than you’ll actually be paying - it’s to ensure you’ll be able to handle higher payments if interest rates go up. So if the posted rate is, say, 2.49%, you need to show you can pay 4.79%, which is the Bank of Canada’s current qualifying rate. However, if you pass the stress test, a lower rate can make a huge difference in what you can buy.
Say you can afford to pay $3,000 a month on your mortgage. If the mortgage rate is 3%, you can afford to borrow $634,000. At 2%, you can borrow $708,000 – while still paying the same $3000 a month. That 1% rate drop adds almost $70,000 to your budget!
Low rates don’t just help buyers: they give homeowners a leg up, too. People are breaking or refinancing their mortgages in record numbers right now. Even with the hefty penalties that come with breaking a fixed-rate mortgage, getting a new one at today's dramatically low rates can be worthwhile since it can potentially save thousands over the life of a mortgage. (But it does depend on your personal situation: you should definitely talk to a mortgage broker to see if you’ll come out ahead.)
“Right now, more people are breaking their mortgage than I’ve ever seen before,” says James Harrison, Mortgage Broker with Mortgages.ca. “And I think those numbers will just keep going up as rates stay low and people see how much they can save.”
Breaking mortgages is also enabling some people financially impacted by COVID to remain in their homes: for some, a savings of a few hundred dollars a month can mean the difference between staying in their home or having to sell.
Related info: Mortgage deferrals are done. What should I do now?
Not sure how the current rates might impact your buying power?
Sit down with a mortgage broker to crunch the numbers – you may be pleasantly surprised at what you can afford. Once you have a better sense of budget, contact one of our Condo Pros: they can help you get into a place that gives you the most value for your money