Why Homebuyers Shouldn’t Wait for Lower Rates

Holding out for lower rates is tempting, but doing so risks entering a possible seller’s market — and a lot more bidding competition.

By Josh Sherman | 3 minute read

All eyes are on the Bank of Canada as prospective homebuyers and mortgage borrowers alike wait to see if policymakers will begin to reverse hikes to the overnight rate that have dramatically increased ownership costs in recent years.

The Bank of Canada’s decision on Jan. 24 to hold its policy rate at 5% likely left some prospective homebuyers cold.

In its war on inflation, the central bank has hiked the overnight rate — which influences the mortgage market and borrowing costs — 10 times since March 2022 for a total of 450 basis points (4.5 percentage points). While the BoC has now maintained the overnight rate four consecutive times, it seems like a rate cut can’t come soon enough for already-overstretched borrowers and homebuyer hopefuls alike. In fact, 48% of Canadians who are considering buying a home this year say waiting to see what happens with interest rates is a potential barrier to their property plans, according to Wahi’s 2024 Homebuyer Intentions Survey. However, experts warn, if you can afford to finance your purchase today, you might not want to delay — even if lower rates appear to be on the horizon later this year, as many market-watchers speculate.  

“Interest rates went up 10 times in less than two years, and yet we haven’t seen wide-scale housing market collapses,” Moshe Lander, senior economics lecturer at Concordia University, tells Wahi. “If all of that interest rate increase and aggression didn’t take the air out of the housing market, what’s going to happen when interest rates come down? The market’s just going to take off.” Prospective buyers who hold out for the BoC to change course might secure a better mortgage rate in the short term, but they could also suddenly find themselves in a market that strongly favours sellers with the return of bidding wars, which have virtually disappeared from major markets such as Ottawa and Toronto. Higher home prices could erase any savings from lower mortgage rates. “You’re probably going to save a little bit of interest, but it’s going to cost you a larger amount in principal,” Lander explains. Should the BoC announce a rate cut, Jason Friesen, managing partner and mortgage agent at Outline Financial, also suggests buying competition will be fierce. “Everyone will come off the sidelines,” he tells Wahi. One of Friesen’s suggestions for today’s homebuyers is to look at locking into a shorter-term rate of two or three years, rather than a five-year fixed-rate, for example. “You potentially lock into a shorter-term rate and purchase at today’s prices so that you’re taking advantage of a lower purchase price,” he tells Wahi. If lending conditions are friendlier upon renewal, borrowers can ideally negotiate a lower rate later. “You marry the house and you date the rate,” he adds. (Friesen emphasizes that “it’s not a one-size-fits-all approach, to be perfectly clear.”) 

The Psychological Barrier of Past Rates 

Today’s homeowners are seeing the fastest and largest increase in interest rates in decades, according to The Canada Mortgage and Housing Corporation (CMHC). However, contemporary rates are hardly extraordinary, historically speaking. “Mortgage rates around 6 to 7% have been common in Canadian financial history,” writes Tania Bourassa-Ochoa, senior specialist of housing research at CMHC, in a recent report. Nonetheless, Freisen suggests that roughly a decade of rock-bottom rates have given some potential buyers unrealistic expectations about what regular borrowing conditions look like.

“Memories have been skewed based on the last few years,” says Freisen of the ultra-low borrowing environment for much of the past decade.

Lander agrees: “Part of the problem that we have now is that we convinced ourselves that this was the new normal and we got addicted to… nearly free money, and so we over indebted ourselves, whether that’s through lines of credit, homes, credit cards — we just completely went beyond our means.” Based on long-term norms, nominal interest rates (interest plus inflation) in Canada should hover around 4 and 4.5%, he suggests.

While anything is possible, Friesen also doubts that we’ll see a return of mortgage rates in the 1-2% range again — barring another global event like the Great Recession that began in 2007. On the other hand, he doesn’t anticipate double-digit rates like those witnessed in the early ‘90s. “The more likely scenario is setting ourselves in a position where we’re OK with rates being in the threes and fours,” he tells Wahi. “It’s more realistic to plan and budget based on higher interest rates.”