Interest rates play a powerful role in shaping the housing market, affecting everything from mortgage affordability and home prices to consumer sentiment. Whether you’re a first-time buyer, upsizing, downsizing, or investing, understanding how interest rates impact your buying power is essential in today’s real estate environment.

What Is Buying Power?

Buying power refers to how much home a buyer can afford based on their income, existing debts, down payment, and the mortgage interest rate. When rates are low, buyers can afford to borrow more while keeping monthly payments manageable. When rates rise, borrowing costs increase, shrinking budgets even if the buyer’s income stays the same.

Let’s say a buyer has a budget of $3,000/month for mortgage payments.

• At a 3% fixed rate, that could support a mortgage of approximately $625,000.
• At a 6% fixed rate, that drops to roughly $490,000, a $135,000 reduction in buying power.

That difference can move a buyer from a detached home to a townhouse, or from an urban centre to a more affordable suburb or rural area.

The Bank of Canada and Interest Rates: A Quick Refresher

The Bank of Canada (BoC) sets the overnight lending rate, influencing how much banks charge consumers to borrow. To fight inflation following the pandemic, the BoC raised its policy rate multiple times between 2022 and 2024. As a result, 5-year fixed mortgage rates (the most common type in Canada) climbed from record lows under 2% to ranges between 5.5% and 6.5% by mid-2025.

Why Interest Rates Rose:

• To curb inflation and cool down spending
• To restore price stability across the economy
• To slow down a housing market that was becoming overheated in many cities

These moves were necessary from a macroeconomic perspective. Still, they’ve made it significantly harder for many Canadians to afford the homes they want.

How Higher Rates Are Impacting Buyers in Canada

Higher Monthly Payments

As rates increase, so do monthly mortgage payments. A 1% increase on a $500,000 mortgage can add over $250/month to your bill. Over a 5-year fixed term, that adds up to $15,000.

Reduced Mortgage Qualification

Mortgage lenders apply a stress test to ensure buyers can afford payments if rates rise. As interest rates rise, so too does the qualifying threshold.

As of 2025, you must qualify at the greater of:

• The offered mortgage rate plus 2%
• Or the Bank of Canada’s benchmark qualifying rate, currently 5.25%, though many lenders use closer to 8% due to high actual rates

This test significantly lowers how much you can borrow, even if your income hasn’t changed.

Changing Home Search Criteria

Buyers are adjusting by:

• Looking in more affordable communities (e.g., moving from Toronto to Hamilton)
• Compromising on square footage or number of bedrooms
• Delaying purchases or considering homes in need of renovation

Real Estate Market Reaction

While rising rates have squeezed buying power, they’ve also helped cool overheated markets, especially in major cities.

Market Trends:

• Softening prices: Home prices in places like Toronto have moderated from 2021–2022 highs.
• Longer days on market: Homes are sitting longer, especially in higher price brackets.
• Greater buyer leverage: Fewer bidding wars and more room to negotiate.

This adjustment has introduced more balance in many Canadian markets; it’s a welcome change for some buyers.

Who’s Most Affected?

First-Time Homebuyers: This group often has limited down payment funds and must borrow the most. Many are opting for condos or considering co-buying arrangements with family.

Move-Up Buyers: Even with equity from a previous home, higher rates may limit their ability to trade up to a larger property.

Investors: Higher borrowing costs have made cash-flow positive properties harder to find. However, some turn to short-term rentals or multi-unit properties to maximize returns.

Strategies to Boost Buying Power

There are practical ways to stretch your home-buying budget, even in a higher-rate environment:

1. Improve Your Credit Score

In Canada, scores above 680 typically access better mortgage rates. Pay off credit cards, avoid new debt, and check your score with Equifax or TransUnion.

2. Maximize Your Down Payment

A 20% or more down payment helps avoid CMHC mortgage insurance, reducing monthly payments and increasing affordability.

3. Consider Longer Amortizations

While traditional amortizations are 25 years, some lenders offer 30-year amortizations, reducing monthly payments, though it increases total interest over time.

4. Look at Government Programs

Canada offers a variety of assistance programs:

• First Home Savings Account (FHSA): Save up to $40,000 tax-free for your first home.
• First-Time Home Buyer Incentive: The federal government offers a shared-equity mortgage for qualifying buyers.
• Land Transfer Tax Rebates: Available in several provinces, including Ontario.

5. Explore Alternative Lenders

Credit unions and B-lenders may offer more flexible terms, though often at slightly higher rates. Always work with a reputable mortgage broker to compare options.

Fixed vs. Variable: What Are Canadians Choosing?

Historically, variable-rate mortgages offered lower rates, but fixed rates have become more popular with rates rising sharply. As of early 2025:

• Over 80% of new Canadian mortgages are fixed-rate
• Many buyers are choosing shorter terms (1–3 years) to wait out high rates without locking in for too long

Should You Wait to Buy?

Many Canadians are asking: Should I wait until rates come down?

The truth is, timing the market is tough. While rates may gradually decrease if inflation stabilizes, home prices may rise again as affordability improves.

If you’re financially ready, buying a home you can afford, within today’s rate environment, might make more sense than waiting and facing higher prices later. Plus, if rates drop, refinancing may be an option.

A Balanced Approach:

• Buy within your means
• Plan for higher payments and emergencies
• Consider locking in a competitive rate
• Work with a mortgage broker to explore your options

The Long View: Real Estate Remains a Solid Investment

Despite higher rates, real estate continues to be a strong long-term investment. While short-term conditions may fluctuate, long-term homeownership builds equity, offers stability, and protects against inflation.

Many industry experts expect interest rates to gradually decline into 2026, though likely not returning to the ultra-low levels of 2020–2021. Returning to the 3–4% range may improve affordability again, but waiting for that scenario could mean missing today’s opportunities.

Interest Rates Matter, But So Does Your Strategy

Interest rates are a major factor in what you can afford, but they’re not the whole story. Rising rates have squeezed buying power in the current market, but they’ve also cooled prices and increased buyer negotiating power. With the right strategy, advice, and financial preparation, it’s still possible to buy confidently, even in a higher-rate environment.