4 Big Ways Rate Increases Are Impacting Real Estate (& Why They Matter)

As the Bank of Canada works to keep inflation under control, rate increases are making home ownership decisions increasingly difficult. Here’s a brief look at what prospective home buyers and sellers should know about the impact of rising interest rates on real estate in Canada.

What’s driving rate increases?

Having remained fairly close to 2% per year for the past 25 years, inflation isn’t something Canadians have normally had to think much about. That changed in June of 2022, however, when inflation hit a 39-year high of 8.1%.

To help reduce and stabilize high inflation, the Bank of Canada began making a series of incremental rate hikes that started in March 2022. The most recent of these, on October 26, saw the central bank’s benchmark interest rate increase from to 3.25% to 3.75%.

How are rate increases impacting real estate?

Interest rates play an important role in real estate matters. If you’ve been hoping to buy or sell your house, for example, it can help to understand how current rate increases are impacting home ownership in Canada.

Here are 4 key ways those impacts are playing out.

1. Mortgages have become more expensive

Although fixed mortgage rates did rise in 2021, both fixed and variable rate mortgages remained historically low.

Here’s how 2021 year-end rates compare with today:


  • Bank of Canada Prime Rate = 45%
  • Average 5-year fixed rate mortgage = 12%
  • Average variable rate mortgage = 46%


  • Bank of Canada Prime Rate = 45%
  • Average 5-year fixed rate mortgage = 57%
  • Average variable rate mortgage = 75%

2. Mortgages are getting harder to qualify for

As a way to determine your ability to meet your mortgage payments should interest rates rise (or you run into financial difficulties), Canada’s mortgage stress test is becoming more difficult to pass.

When you apply to a regulated lender, you have to show you can afford a mortgage at whichever is higher:

  • The stress test rate of 25%
  • Your mortgage contract rate plus 2%

With mortgage rates increasing so much this year, new home buyers are sometimes being stress-tested at rates of 6%-7% and more.

3. Real estate sales are declining

As mortgage interest rates have increased, real estate demand, listings, and sales volumes have naturally decreased.

According to the most recent statistics from the Canadian Real Estate Association:

  • National home sales dropped by 9% between August and September this year
  • The number of transactions in September 2022 was almost one-third (32.2%) lower than it was in September 2021

4. Real estate prices are beginning to drop

With fewer people qualifying for mortgages (or qualifying for less), reduced demand for homes is starting to affect prices.

  • Following a second record-decline in September, house prices are expected to continue their downward trend into 2023

What home buyers and home sellers should know

You can’t do away with high interest rates. But you may be able to moderate their impact on your decision to sell or buy a home.

To support real estate decisions that you can feel comfortable with over the long run, it’s important to:

  • Understand and carefully weigh your financial situation and outlook
  • Seek professional mortgage or financial advice
  • Monitor current real estate trends

With that in mind, here’s a quick example of what the experts are saying about interest rate and house price expectations.

What are interest rates expected to do?

Although they’re unlikely to reach the lows of recent years, rates should at least begin to level off before too much longer.

According to CMHC, mortgage rates are expected to:

  • Peak as we enter 2023
  • Stabilize in the early part of 2024
  • Decline slightly over the course of next year

What are house prices expected to do?

Despite the recent drop in demand, Canada still faces a housing shortage and real estate inventory remains low.

According to RBC, house prices are expected to:

  • Continue their decline over the winter
  • Bottom out in the spring
  • Adjust to the higher-rate environment early next year

Bottom line

When it comes to real estate decisions, navigating the combined impact of rate increases and inflation isn’t easy. But while rising interest rates and the possibility of a recession rank as two of the top worries around buying a home, 61% of Canadians agree that real estate is the best long-term investment they could make over the next 5 years. Rather than trying to predict the future, your best course of action may be to sit down with a lender, mortgage broker, or financial advisor and work through some best- and worst-case scenarios. You can also take comfort knowing that the Bank of Canada expects inflation to fall to about 3% in late 2023, before returning once again to 2% in 2024.

For most people, a home purchase is one of the biggest transactions of their life, so it’s important to get the right mortgage for your situation. Get a mortgage now!

Frequently Asked Questions About Rate Increases

How does raising interest rates help to bring inflation under control?

Inflation happens when demand for goods and services outstrips supply (like it did coming out of the pandemic) and prices rise across the economy. By raising interest rates, the Bank of Canada makes borrowing money more expensive—and saving or investing money more rewarding—which slows spending and gives supply a chance to catch up with demand.

What’s the difference between a regular variable-rate mortgage and a fixed payment variable-rate mortgage?

When rates increase, the interest portion of variable-rate mortgage payments also increase. With a regular mortgage, this causes total payment amounts to go up. With a fixed payment mortgage, more of each payment goes toward paying the interest owing, and less goes toward paying the principal, keeping total payments the same.

What is a trigger rate?

When rates increase to the point where your entire fixed payment amount is going toward paying the interest owing (and none is going toward your principal), you’ve reached your trigger rate. Any interest owing in excess of each payment at this point is typically added onto your principal.

What is a trigger point?

If excess interest is added onto your principal long enough, you may end up owing more in total than you originally borrowed. This is called your trigger point, and reaching it usually requires that you make a lump-sum payment or bigger monthly payments, extend your amortization, or switch to a fixed-rate mortgage.

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Leanne Armstrong

Leanne Armstrong is a HubSpot-certified freelance content writer specializing in business, technology and finance. As a former entrepreneur with a background in accounting and social psychology, she writes for a wide range of globally recognized organizations. Her work has appeared in publications like Forbes, Huffington Post and CanadianSME Magazine.