With recent rate cuts and more forecasted in the next year, many Canadians are wondering: Should I buy now or wait for rates to decrease further?
What Happens to Mortgage Payments When Rates Drop When interest rates go down, your mortgage payment decreases too. For example, every 0.25% rate cut reduces your payment by around $12 per month for every $100,000 in mortgage, assuming a 25-year amortization. Let’s break that down.
Example: If you're purchasing a $1,000,000 home with a 20% downpayment, you’re left with an $800,000 mortgage. Here’s how your monthly payments shift as the interest rate falls:
Over a 3-year term, a 4.75% rate would cost you $163,440, but at 4%, you’d save $11,952, paying $151,488. That’s enough for a trip or new appliances – not pocket change!
But here’s the big question: Will home prices increase by more than 1% while waiting for rates to fall 0.75%?
What Happens to Prices When Interest Rates Drop
Between March 2022 and July 2023, the Bank of Canada increased its rate 10 times, from 0.25% to 5%. Higher rates meant fewer buyers and lower prices, with a lagging effect on the market.
The highest average price of $1,298,705 was in March 2022, right after the first rate hike. By January 2024, when the rate peaked, the average price dropped to $1,025,262—a 21% decline.
6 Key Things to Consider If You're Deciding to Buy Now or Wait
Between March 2022 and July 2023, the Bank of Canada (BoC) raised the overnight rate 10 times, going from 0.25% to 5%.
To clarify, the overnight rate is what banks charge each other for short-term loans, and it directly affects the prime rate, which in turn influences consumer borrowing costs for things like variable-rate mortgages and credit lines. The actual interest rate a borrower gets depends on factors such as creditworthiness and the bank’s strategy, like attracting more mortgage clients or investments.
As rates rose, we saw a cooling effect on the housing market—more homes listed for sale, but fewer active buyers. This led to lower sales volumes and a drop in home prices.
Interest rate changes don’t impact the market right away. Instead, there’s a lag of several months before the effects become noticeable. When comparing the BoC's interest rate hikes to the average home price in the Greater Toronto Area (GTA), it becomes clear that as rates increased, home prices declined.
Pandemic-Era Rates Won’t Return:
The 1% rates during the pandemic were a once-in-a-lifetime situation. Waiting for sub-3% rates may leave you waiting forever.Price Growth Outpaces Rate Savings:
Over the last 20 years, Toronto home prices have increased by an average of 12.5% per year. While we may not see that again, home prices will likely rise faster than the interest rate savings you’re waiting for.Pent-Up Demand:
Toronto's housing market saw a massive slowdown in 2023, with only 65,688 homes sold versus the usual 92,000. With interest rate cuts on the horizon, we’re about to see a more active market.You Date the Rate, Marry the Price:
Rates are temporary, lasting for only the term of your mortgage, but the price you pay for your home is forever. Consider long-term price appreciation over short-term rate changes.The Sweet Spot is Here or Near:
There’s always a sweet spot when interest rates aren’t too high, and prices haven’t surged. But the tricky part? You only realize it when it’s passed.Buy When It’s Right for You:
Ultimately, the right time to buy is personal. If you have a solid downpayment, job security, and plan to stay in your home for 5-10 years, there’s no bad time to buy.
The market is changing, but your personal readiness is key. At TEAM SM HOMES, we’re here to guide you through those decisions.
Bottomline:
The perfect time to buy isn’t about predicting interest rates—it’s about your personal readiness. If you’re financially stable and ready to commit, now could be your moment. Don’t wait for rates to drop if prices are likely to rise.
