With the economy in flux, it’s essential to keep an eye on interest rates, as they play a significant role in how much you’ll end up paying for your new home. Let’s break down what interest rates are, how they impact your mortgage, and what you should consider when purchasing a home in various cities across Ontario.

What Are Interest Rates in Ontario?

Simply put, an interest rate is the cost of borrowing money. When you get a mortgage, you’re borrowing money from a lender, and they charge you a percentage for that service—this is your interest rate. 

A lower interest rate means you’ll pay less in interest over time, while a higher rate will cost you more. Even a small change in interest rates can make a huge difference. For example, if you’re looking to buy a $600,000 home and the rate increases by 1%, your monthly payments could jump by a few hundred dollars. That’s why keeping an eye on interest rates is so important when you’re planning a home purchase.

What Are the Current Interest Rates in Ontario?

As of October 2024, the Bank of Canada’s interest rate sits around 5%. This is a bit lower than what we saw earlier this year when rates were higher due to inflation, but it’s still significantly above the ultra-low rates we saw during the pandemic (around 2-3%). While these current rates might feel high compared to those pandemic lows, they’re actually in line with historical norms. 

For perspective, over the past few decades, mortgage rates have fluctuated between 4% and 7% depending on the economy. However, a 5-6% rate can still feel like a big financial hurdle for those looking to buy in pricey cities like Toronto or Ottawa.

How Do Interest Rates Impact Your Mortgage?

Interest rates directly affect how much house you can afford. The higher the interest rate, the more you’ll pay each month, which reduces how much you can borrow. Here’s how this plays out in some of Ontario’s major cities:

Toronto

Toronto’s housing market is one of the most expensive in Canada. Even a small increase in interest rates can add hundreds of dollars to your monthly payments. With an average home price around $1 million, a 1% increase in the interest rate can raise your mortgage payments by $500 to $700 each month. That’s a big deal for homebuyers who are already stretching their budgets.

Ottawa

Ottawa’s housing market is more affordable than Toronto’s, but higher interest rates still have a noticeable effect. For example, if you’re looking to buy a home in the $700,000 range, a 1% increase could add about $400 to your monthly mortgage payment. That extra cost can make a big difference when you’re balancing other expenses like property taxes, utilities, and maintenance.

Hamilton

Hamilton, which has seen significant growth in housing prices over the past few years, is another city where higher interest rates can impact affordability. If interest rates go up by just 1%, a home priced at $600,000 could result in a $300- $400 monthly increase. For buyers in fast-growing areas like Hamilton, this can limit their home options.

Fixed vs. Variable Rates: What’s the Difference?

When you’re ready to buy, you’ll also need to decide between a fixed-rate  and a variable-rate mortgage.

Fixed-rate mortgages: Lock in an interest rate for the entire term of your loan. This offers stability since your monthly payments will stay the same regardless of how the market changes. It’s a good option if you expect rates to rise or prefer predictable payments.

Variable-rate mortgages: On the other hand, change with the market. Your interest rate—and therefore your monthly payments—can fluctuate. If rates go down, you could save money, but if they rise, you’ll pay more. Many homebuyers who chose variable rates in 2022 have seen their payments increase significantly as rates climbed.

What’s the Mortgage Stress Test?

If you’re applying for a mortgage, you’ll also need to pass the **mortgage stress test**. This test ensures that you can afford your mortgage if rates rise by 2%. Even if you’re looking at lower interest rates today, the stress test is there to protect you from future financial difficulties.

The stress test is especially important in markets like Toronto and Ottawa, where homes are more expensive, and there’s less wiggle room in many buyers’ budgets. However, if you’re renewing your mortgage and sticking with your current lender, you may not need to go through the stress test again

Help for First-Time Home Buyers

If you’re a first-time buyer, Ontario offers a few programs to make homeownership more accessible:

• First-Time Home Buyer Incentive: The federal government offers an interest-free loan of up to 10% of the home’s purchase price. This reduces your mortgage amount, making your monthly payments more manageable.
• Land Transfer Tax Rebate: Ontario offers rebates on land transfer taxes for first-time buyers. This can save you thousands of dollars.
• Home Buyers’ Plan (HBP): You can borrow from your RRSP to put toward your down payment. It’s a great way to boost your down payment without taking on more debt

What Should You Do as a Buyer?

If you’re thinking about buying a home, staying informed about interest rates is key. Here’s what you can do:

• Talk to a mortgage broker: They can help you find the best rates and explain how the market is changing.
• Get pre-approved: This will give you a better idea of what you can afford and lock in a rate for up to 120 days.
• Stick to your budget: It’s tempting to stretch your finances, but buying a home you can afford—even if rates go up—will give you peace of mind in the long run.

While interest rates are an important factor in your home-buying journey, they’re just one piece of the puzzle. Focus on finding the right home that fits your budget and lifestyle, and you’ll be in a good position no matter where rates go.

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