Currently, the interest rate set by the Bank of Canada is 2.5%. Following that, Royal Bank and TD Bank have raised their prime lending rates to 4.7%. Some economists are hopeful that by 2023, inflation will be more in hand, and the Bank of Canada will loosen its grip.

While the runaway market of 2021 and the beginning of 2022 has slowed down, houses are still being bought and sold. There are homebuyers now who can’t and won’t wait until the number drops. Let’s look at how the changing mortgage rates are affecting buyers.

Stressing the Stress Test

First, buyers must stress test their finances to a much higher benchmark than before, at 5.25%.  If buyers can move past the cold feet of discovering that their budget isn’t as strong as they once had thought, they’ll find that home values are slowly leveling off. Home prices are beginning to return to more reasonable levels as values level off.

In 2021, when multiple offers were the norm, there was story after story of homeowners being persuaded to forego home inspections to close on a deal. While that risk may have worked out for some buyers, for others, the home they bought was discovered to need more work than they had anticipated. As the market cools down, buyers are much more cautious when purchasing. Suddenly, buyers can request more from sellers to ensure the house they’re looking at is sound, with no surprises after closing day.

What Experts Are Forecasting

At the end of July 2022, the Royal Bank of Canada stated that a historical correction was taking place. They estimate home resales will fall 42% from early 2021 to 2023. Due to the high-interest rates creating a financial barrier and a decrease in demand, house prices will give. Buyers in higher-priced areas like Ontario and British Columbia may feel the most significant effects of these corrections.

RBC quickly notes that it is not a collapse, merely a correction.  Though many are relieved by the market cooling down, new homeowners are still finding it difficult to break into the real estate market, especially with the rise in interest rates. Home prices may be dropping, but mortgage rates are creating another barrier.

Is it a Buyer’s Market?

What once was an extremely hot seller’s market has quickly balanced. Though not a full buyer’s market, buyers have now flipped from having the least negotiating power due to a lack of inventory to dealing for their best price. Buyers are more confident to walk away if a seller doesn’t lower their cost to match the buyer’s offer.

Conversely, buyers — especially first-time buyers — are finding they don’t have the flexibility in their offers they may have had a few months ago before the interest rates went up. Many home buyers’ budgets are forcing them to make the decision between purchasing and renting, and based on the price of average rent in Canada, more people are turning to the rental market instead.

Ultimately, mortgage rate increases are affecting buyers significantly; some as they realize they don’t have the budget with the new rates and the benchmark for the financial stress test, and others are playing the waiting game so they can make the best use of their money to get in the home they want.

If you are a buyer considering purchasing a home, it is essential to focus on what is happening in the present. Both in the market and in your personal circumstance. Reach out to one of our experienced local agents, who will be happy to advise you on how best to take advantage of current mortgage rates.