Thursday, April 22, 2010

Mortgage interest rates, The Bank of Canada and our current GTA real estate marketplace


Houses sales will slow down when interest rates increase.

Many people are hoping that the real estate market slows down, they feel things are too fast and hot and the recent increases in real estate prices have caused more inflation in Canada than the Bank of Canada wanted or anticipated.

The Bank of Canada announced on Tuesday that although they promised to not increase the prime interest rate until July 1 of this year, they said that they may "break that promise" and increase the bank prime rate at the beginning of June. Their reason is that the economy is too hot and the inflation rate is currently too high, above their target inflation rate.

By increasing interest rates, this will increase mortgage interest rates and less people will be able to afford to buy a home so the real estate market will slow down. This is what the Bank of Canada wants to happen and many others want to happen. They feel the inflation rate is getting too high.

When interest rates go up, this always means that people who are barely able to afford a home will not be able to afford a home ( or at least afford less), they will not be able to purchase or will have to purchase at a lower price and this will have a negative ripple effect on the entire marketplace and the real estate market will slow down. Prices may not fall right away, but they will stop increasing and the demand will decrease.

Also, July and August are typically the two slowest months in real estate (next to December) so the seasonal real estate slowdown along with increased interest rates plus the HST coming into effect July 1 will most likely slow our real estate marketplace.

I hope this helps explain things to you! :-))

Thank you,


  1. These rate increases will be very interesting to first time buyers or people with very little equity when the rates reset and they people will need to refinance in 5 years and their mortgage is upside down (if real estate starts to decline)and they have to come up with the difference.

    I think this scenario will make the sub prime looks like a fairy tale.

  2. Hi, thanks for your comments. As long as the people don't have to sell their property when they renew, they will be fine.

    I agree that the prices upon renewal will be critical to the process. If housing prices are down in 5 years from today, then our entire economy will be down too.

    We probably won't go the way of the US subprime crisis because our banking system is very different compared to the US.

    All the best,

  3. Ok, but upon renewal the value of the loan is higher than the value of the property wouldn't you have to put up the difference when the loan is renewed?

    The only difference is that the banks won't go under as CMHC is footing the bill, but the tax payer is on the hook. Canada just like US has mortgage backed securities, so loan get packaged and are sold to investors.

    I am still astonished that some people think mortgage insurance protects them, but in reality only protects the lender.

  4. You would only need to put up the difference if you switched loan companies.

    Yes, CMHC will bail out the banks, but I'm not sure if CMHC sells the securities or not.

    Yes, the mortgage is for the lender in return for the money they gave you to buy the property in the first place.

    Have a great day!