April 1, 2023

Unlocking the Link: How Canadian Interest Rates Shape the Real Estate Market

Beautiful Canadian home

The Bank of Canada plays a crucial role in managing the Canadian economy through its management of interest rates. Its decisions on interest rates can have a significant impact on the housing market too.

Read on to learn more.


Interest rates are the cost of borrowing money. When the Bank of Canada sets interest rates, it determines the cost for individuals and businesses to borrow from financial institutions. They do it for several reasons, primarily to control inflation and stabilize the economy.

The Bank of Canada tries to ideally keep inflation within a 1–3% target range. Its primary interest rate is the overnight lending rate, which is the rate at which banks can borrow money from each other overnight.


The overnight rates influence different interest rates in the economy, such as the prime rate—the rate banks charge their most creditworthy customers. Changes to this rate can have a ripple effect throughout the economy, affecting borrowing costs for businesses and consumers.

When setting interest rates, the Bank of Canada also considers other economic factors, such as employment, GDP growth, and the global economy. It uses various tools to adjust interest rates, such as buying or selling government bonds and adjusting the reserve requirements for banks.


One of the primary factors determining the demand for housing is affordability, which is influenced by interest rates. When interest rates are low, it’s cheaper for individuals and businesses to borrow money. This increased borrowing power can lead to a higher demand for homes and rising home prices.

Conversely, when interest rates are high, it’s expensive to borrow money. So, homeowners have less borrowing power, and houses become less affordable, which can decrease demand and home prices.


Fixed-Rate Mortgage

As the name suggests, the interest rate for the entire mortgage term remains the same in a fixed-rate mortgage, regardless of any changes in the interest rate environment. Homebuyers who value stability and predictability in their finances prefer fixed-rate mortgages.

Variable-Rate Mortgage

Variable-rate mortgages in Canada are typically offered with a term of 5 years. The interest rate depends on the lender’s prime rate, which is influenced by the Bank of Canada’s overnight lending rate. Variable-rate mortgages can offer homebuyers lower initial interest rates than fixed-rate mortgages, but they also come with the risk of rising interest rates and increasing monthly mortgage payments.

Hybrid-Rate Mortgage

In Canada, there are also hybrid mortgage options available, which offer a combination of fixed and variable rates. For example, a homebuyer may choose a 5-year term with a fixed rate for the first three years and a variable rate for the remaining two years.


The Bank of Canada’s interest rates is vital in determining housing prices. A trusted realtor broker can help you choose a financing option that best suits your needs.

If you want to buy a home in Toronto, Vaughan, or the Greater Toronto Area, contact John Burdi – Realtor Broker. I can guide you through all the financing options and help you purchase your dream home at the best price. Contact me today!

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