What are interest rates, anyway?

Interest is what consumers or institutions pay to borrow money. It’s also what a bank might pay a client for leaving money in their account. When you take out a loan, “you'll be given the cash and you will need to repay a little bit of that loan over time,” said Andrew DiCapua, principal economist at the Canadian Chamber of Commerce in Ottawa. “Some of what that repayment includes is interest.”

Commercial banks like RBC, Scotiabank, TD Bank, CIBC, and BMO use “prime rates,” which are their starting rates to charge consumers who borrow money. Those prime rates are guided by the Bank of Canada’s overnight interest rate — a tool that central banks use to keep inflation in check.

What does the Bank of Canada rate announcement mean for real estate?

Rate Decrease for Variable-Rate Mortgage Holders

Immediate Impact: Your interest rate typically drops, leading to lower monthly payments or a larger portion of your payment going toward the principal.

Benefit: More financial breathing room as payments shrink or your loan balance decreases faster.

Rate Increase for Variable-Rate Mortgage Holders

Immediate Impact: Your interest rate typically rises, which can increase your monthly payment or reduce the amount going toward principal.

Consideration: Higher payments can tighten monthly cash flow, and some borrowers may need to adjust budgets or explore options like switching to a fixed rate.

Rate Decrease for Fixed-Rate Mortgage Holders

Delayed Impact: Fixed rates aren’t tied directly to the BoC’s key rate; they follow five-year bond yields, which can move differently.

Renewal: When renewing, you might find lower rates, but it’s not immediate and depends on bond market conditions.

Rate Increase for Fixed-Rate Mortgage Holders

Short-Term Stability: Your rate and payment remain unchanged until renewal, offering predictability during rising-rate periods.

Renewal Risk: When it’s time to renew, higher rates may lead to increased payments, depending on bond market conditions at that time.

Rate Decrease for New Buyers & Renewers

Improved Affordability: Lower rates can make mortgages cheaper, potentially allowing buyers to qualify for more or reduce monthly costs.

Market Sentiment: Cuts send a positive signal, encouraging some buyers to enter the market, even if the change isn’t massive.

Rate Increase for New Buyers & Renewers

Reduced Affordability: Higher rates increase borrowing costs, which can lower purchasing power or monthly affordability.

Buyer Behaviour: Some buyers may pause their plans, reassess budgets, or shift expectations on price, location, or property type.

Rate Decrease: Broader Implications

Cheaper Borrowing: Other variable-rate debt, like lines of credit, also becomes cheaper.

Economic Support: Rate cuts are intended to boost economic activity by making borrowing more attractive.

Not a Quick Fix: The impact on affordability is gradual, and structural housing issues require more than just rate cuts to solve. In essence, rate cuts offer welcome relief — especially for variable-rate borrowers — and signal a potentially cheaper borrowing environment, but fixed-rate borrowers and overall market affordability see changes more slowly.

Rate Increase: Broader Implications

Cooling Demand: Rate hikes are designed to slow borrowing and spending, which can temper buyer demand and reduce competition.

Price Pressure: In some markets, this can lead to longer days on market and more balanced conditions between buyers and sellers.

The Takeaway

Whether rates rise or fall, the impact on real estate isn’t instant or one-size-fits-all. Rate cuts can stimulate demand and ease borrowing costs, while rate hikes tend to slow activity and encourage more thoughtful decision-making. Understanding how interest rate changes affect your mortgage type, timing, and goals is key to navigating the market with confidence.