There’s no way to predict the future, but the best way to make an educated guess is by looking at the past. The prime rate plays a significant role in determining the cost of mortgages. If you have a variable-rate mortgage, your interest rate is directly connected to the prime rate. When the prime rate goes up, your mortgage interest rate increases, resulting in higher monthly payments. On the other hand, if the prime rate goes down, your payments will be lower. The prime rate changes regularly, and lenders pass on these changes to borrowers, causing your mortgage costs to go up and down.
This content was originally published by Zoocasa. View original content and infographics here.
Although fixed-rate mortgages offer stability with consistent payments, the prime rate indirectly affects them. When the prime rate increases, it often means higher borrowing costs. As a result, lenders may raise the interest rates on new fixed-rate mortgages to reflect the increased lending cost. Even though your payments won’t change once you lock in a fixed rate, future borrowers may face higher rates if the prime rate is high.
The prime rate also affects mortgage qualification. When the prime rate is high, lenders raise their interest rates, leading to higher monthly payments for borrowers. This may increase your debt-to-income ratio, making it harder to qualify for a mortgage. Lenders may also tighten their criteria when the prime rate increases, making it more difficult for some buyers to get approved. Because of how closely tied mortgage payments are to the prime rate, it’s important to monitor rate changes and stay informed on the potential financial impact.
Zoocasa analyzed the Bank of Canada’s rate changes from 2022 to 2024, focusing on Toronto, Canada’s largest city and most active real estate market. Discover how these shifts impact Toronto’s housing trends and what the rate cuts mean for Canada’s national real estate market.
A Look Back at the BoC’s Rate Cuts
Between September 2010 and February 2015, the prime rate in Canada experienced minor changes. It rose to 3.00% in 2010 before slightly decreasing to 2.85% by 2015. This period reflected economic stability as markets recovered from the financial crisis of 2008.
From July 2017 to October 2018, consistent increases of 0.25% brought the rate from 2.70% to 3.95%, driven by stronger economic growth and inflation control efforts. In early 2020, the prime rate dropped dramatically from 3.45% to 2.45% within a month in response to the COVID-19 pandemic, with two rapid 0.50% cuts to provide economic liquidity during this period of global uncertainty.
Toronto Real Estate: The Big Market Shift
Between mid-2022 and 2024, Toronto’s real estate market experienced a sharp contraction in sales volume, directly influenced by rapid interest rate hikes. These increases, aimed at cooling inflation, profoundly affected buyer activity. From March 2022 to July 2022, sales in Ontario’s busiest market dropped by more than half—from 10,862 to 5,250. This was a clear sign that higher borrowing costs made it harder for buyers to enter the market, particularly those highly leveraged or dependent on variable-rate mortgages.
The most significant drop in sales occurred in Toronto during the summer of 2022. In March 2022, with a prime rate of 2.70%, the market was still experiencing strong activity, with sales reaching upwards of 10,862.
However, as the Bank of Canada raised interest rates throughout 2022 (reaching 4.70% by July and 5.45% by September), the cost of borrowing soared, and so did the difficulty for buyers to qualify for larger loans. By December 2022, sales had reached a low point of just 3,090, representing a more than 70% reduction from March 2022 levels.
This steep decline can be attributed to many buyers pausing their home searches, reassessing their affordability, or being priced out of the market altogether as interest rates climbed, reaching 6.45% that month.
Despite this, the beginning of 2023 marked a modest rebound in sales in Toronto’s market. By March 2023, sales had recovered to 6,896, mainly due to buyers re-entering the market as they adapted to the higher interest rate environment.
Nevertheless, this recovery was inconsistent, and the overall sales volume throughout 2023 remained well below pre-rate hike levels. Interest rates remained elevated throughout 2023, hovering around 6.70% to 7.20%, contributing to slower sales.
For example, after a brief uptick in sales in May 2023 (up to 9,012), the market slowed again as the year progressed, with sales dropping to 4,870 by July 2023 and 4,642 by September 2023. Although sales volume was no longer in the drastic lows of late 2022, it remained far below the levels seen during the pre-rate hike period of early that year.
Sales volume remained volatile in 2024. While there was some recovery in sales compared to the lowest points of 2022, the market was still far from its peak levels. In March 2024, sales reached 6,560—40% below March 2022's levels. The ongoing elevated prime rate of 7.20% during the early months of 2024 played a role in suppressing sales activity. This is because the steep rise in prime rate from 2.70% in March 2022 to 7.20% by early 2024 has caused prospective buyers' mortgage payments to jump significantly. Meanwhile, buyers stretching their budgets during the low-rate environment of 2020-2021 found it increasingly difficult to meet the stress test requirements set by lenders.
What to Expect as BoC’s Rate Changes Continue
As we look ahead, the recent decline in interest rates following the elevated levels of 2022-2024 could open new doors for the housing market. Despite a significant drop in sales volume, Toronto's real estate market showed resilience by maintaining stable average home prices. Between March 2022 and July 2022, the average price declined by 17%, from $1,298,666 to $1,073,213.
From July 2022 to August 2024, prices fluctuated but did not experience a steep collapse. The real estate market from mid-2022 to 2024 was characterized by a dramatic decline in sales volume due to rapidly increasing interest rates.
In December 2022, sales had dropped to 3,090 from 10,862 in March 2022, marking a 71% decline at their lowest point. Despite this, average prices remained relatively stable, with only moderate decreases. Although sales recovered slightly, they remained well below their pre-rate-hike levels, demonstrating the long-lasting effects of higher borrowing costs in the market.
By August 2024, the average price in Toronto had settled at $1,074,425, reflecting the market's ability to withstand the challenges posed by the interest rate hikes. Many sellers held onto the high price expectations from the early 2022 market peak, resulting in a standoff where fewer transactions occurred, but prices remained stable rather than significantly dropping.
Additionally, investor activity is a significant force in Toronto's housing market, with investors recognizing long-term value despite the high-interest-rate environment. This is particularly evident in Toronto, a city with strong rental demand, where soaring rents have made real estate an increasingly attractive investment option.
Wherever you buy or sell real estate in Canada, lower borrowing costs are set to spark renewed buyer interest and boost market activity, creating a prime opportunity for homebuyers and investors.
Now that rates are dropping, the real estate market will likely experience a sales activity recovery fueled by pent-up demand and improved affordability. This rebound will be gradual but steady, with buyers returning to the market and sellers feeling more confident in listing their homes. Prices are likely to stabilize or see modest growth as demand rises, but the market is expected to remain more balanced compared to the frenzied activity of previous years.
Economists predict that lower rates will continue into 2025, poised to create a healthier, more active housing market. The pace of growth, however, will depend on how quickly rates decline and whether supply can meet rising demand. In the meantime, the current higher-rate environment presents buyers with a unique advantage—lower-priced properties and more substantial negotiation power.