Updated: Feb 17, 2021
Interest rates, which are set by the Bank of Canada (BoC), have a major effect on real estate both in London, ON, and throughout Canada. When the BoC reduces its interest rate, private banks typically follow suit and lower their mortgage rates, which in turn encourages people to buy homes.
In response to the COVID-19 pandemic and lockdown, the BoC slashed its benchmark rate to just 0.25%, which resulted in some banks offering five-year fixed mortgages for less than 2%. That has helped keep the real estate market in Southwestern Ontario red hot, even when the economy overall has struggled.
If you’re selling a house in London, ON, interest rates will likely impact the amount of interest you receive from potential buyers. As a seller, you may also be considering buying a new home yourself, in which case interest rates will factor into when you decide to sell your current home and buy a new home.
To help you figure out how interest rates will affect you, let’s take a deeper dive into where interest rates are heading, how they’ll affect mortgage rates, and what all of this means if you’re selling or buying a home in Southwestern Ontario.
Are interest rates going up or down in Canada?
Predicting where interest rates are headed isn’t easy, especially during such uncertain economic times as these. But it’s good to have an idea of where they are likely to be if you plan on selling a home in London, ON.
If interest rates look set to go even lower, then potential buyers may hold off on buying a house so that they can enjoy a break on their mortgage in the future. If that were the case, you’d probably want to wait before putting your house up for sale. But if interest rates look like they’ll go up, you would want to sell sooner as buyers may rush to buy before mortgage rates increase.
It’s hard to say for sure what the Bank of Canada is going to do in terms of interest rates, but we have some idea. The BoC recently released a statement where they said that they “will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”
In other words, the BoC isn’t going to start raising interest rates until an inflation rate of 2% “is sustainably achieved.” That last part is important because it means the BoC wants to see the inflation rate stay at 2% for a while before it increases rates. The bank won’t rush into raising rates if inflation increases dramatically one month only to decline again the next, which is a distinct possibility in the age of COVID and lockdowns.
Importantly, the BoC doesn’t expect to “sustainably achieve” that inflation target until 2023, so interest rates are likely to stay at near-zero levels until then.
However, with a vaccine seemingly on the horizon, it’s also unlikely that the BoC will go any lower with interest rates. Earlier in the pandemic, some analysts had suggested that negative interest rates were a possibility, but that’s looking increasingly unlikely now.
But that doesn’t mean mortgage rates will stay low
While low Bank of Canada interest rates have a big impact on mortgage rates, they are not the only factor in determining them. Another factor, especially for long-term fixed mortgages, is the 5-year Canadian bond. The 5-year Canadian bond yield isn’t set by the Bank of Canada, but by the market. That mean it fluctuates daily, so it’s much more affected by current events—like, say, the results of a vaccine trial.
For that reason, don’t assume that mortgage rates won’t rise just because the BoC’s interest rates are also not rising. In fact, with the recent announcement of Pfizer’s successful COVID vaccine trial, many lenders have indicated that rates for some mortgages will start to inch up.
The 5-year Canadian bond yield is currently at 0.46%. While that’s down from the 1.63% it was at in December 2019, it’s up from the 0.32% low in July of this year. If that rate keeps going up or holds steady, expect mortgage rates—especially for the popular 5-year fixed-rate—to go up.
How low interest rates affect selling a home in London, ON
Low interest rates usually encourage a seller’s market. When interest rates are low, mortgage rates are usually also low. In turn, that means buying a house becomes more affordable, so sellers usually have an easier time finding more interested buyers.
But as we’ve shown, interest rates aren’t the be-all and end-all of mortgage rates. With bond yields also going up, mortgage rates are probably going to increase. So, while mortgage rates will likely stay low, the period of ultra-low mortgage rates could be coming to a gradual end.
If you’re thinking of selling a house in London, ON, that doesn’t mean you should necessarily start panicking. As mentioned, mortgage rates are going to stay very low for a while, just not as low as they have been. For now, London and Southwestern Ontario continue to be sellers’ markets and interest from buyers is likely to remain strong, especially if a vaccine in 2021 helps bring even more buyers onto the market.
Locking in super-low mortgage rates if you’re selling and buying
Of course, if you’re selling your home, you’re probably also looking to buy a home. That means low interest rates are going to affect you not just as a seller, but as a buyer too. If that’s the case, you will want to sell your house sooner rather than later in order to lock in low mortgage rates on your new house.
To do that, speed is of the essence. The faster you sell your house, the sooner you can have the money in your bank account you need to begin looking for a new home. Even in a seller’s market, there’s no guarantee that you will be able to sell your house immediately. Your property may be in need of time-consuming repairs, for example, or you may be worried about selling your home during the pandemic. It’s also worth remembering that home sales do tend to drop off during the cold winter months before rebounding in the spring.
One way to get around these potential hiccups is to sell your house for cash to a real estate solutions company. That way you can start the new home search faster and give yourself a greater chance of locking in super-low mortgage rates, especially on popular long-term fixed mortgages.