As a Toronto real estate investor, understanding and projecting Canada’s interest rates is crucial for making informed decisions. Let’s break down the current situation and provide tools to help you make your own projections.
Bank of Canada's Policy Interest Rate
Source: Elevate Realty, Bank of Canada, TD, CIBC, BMO, RBC, Scotia.
As of July 24, 2024, the Bank of Canada’s policy interest rate stands at 4.50%.
As of July 24, 2024, the Bank of Canada’s policy interest rate is 4.50%. This rate is the foundation for many other interest rates that affect your investments.
Bank of Canada's Policy Interest Rate Forecast By Major Bank
Major Canadian banks provide forecasts for the Bank of Canada’s policy rate. While these aren’t guarantees, they offer valuable insights.
These forecasts suggest a general expectation of a gradual decrease in the policy rate over the next year. However, economic conditions can change rapidly, affecting these projections.
Source: Elevate Realty, Bank of Canada, TD, CIBC, BMO, RBC, Scotia.
Key Factors Influencing Interest Rates
To make your own projections, consider these factors:
- Inflation: Higher inflation often leads to higher interest rates.
- Economic growth: Strong growth can lead to rate increases, while weak growth may lead to cuts.
- Employment rates: Low unemployment can push rates up.
- Global economic conditions: International economic trends can influence Canada’s monetary policy.
How to Project Canada Mortgage Rates
Use these formulas to project different types of mortgage rates:
- Canada 3 Year Fixed Mortgage Rate: 3 year bond yield PLUS 1% to 2%
- Canada Prime Rate: Policy interest rate PLUS 2.2% to 2.35%
- Canada Variable Mortgage Rate: Prime MINUS 0% to 1%
- Canada Home Equity Line Of Credit (HELOC) Rate: Prime PLUS 0% to 2%
The Bond Yield Connection
When investors buy Canadian bonds, they’re essentially locking in an interest rate for the future.
So, the 3-year bond yield is closely related to the policy interest rate. If investors expect the Bank of Canada to raise rates, bond yields typically increase, and vice versa.
What is a fixed mortgage rate?
A fixed mortgage rate is a set interest rate that remains constant throughout the term of the mortgage loan. With a fixed rate, your monthly mortgage payments stay the same, providing stability and predictability over time.
It’s like locking in your rate to shield yourself from fluctuations in the market, giving you peace of mind knowing exactly what you’ll owe each month.
What is a Prime rate?
The prime interest rate is a rate set by a bank and serves as a benchmark for interest rates on various loans and financial products.
Banks typically set their prime rates based on the central bank’s policy rate and other factors, like prevailing market conditions and their own cost of funds.
What is a Variable Mortgage rate?
A variable mortgage rate can change over time based on the prime rate, potentially affecting your monthly payments.
While variable rates offer flexibility and potential savings, they also come with the risk of increased payments if rates rise.
What is a HELOC rate?
A HELOC allows you to borrow against the equity in your home as needed, similar to a credit card. The interest rate on a HELOC is variable, based on the prime rate.
HELOC rates are typically lower than other forms of credit, making them a popular option for accessing funds for home improvements, debt consolidation, or other expenses.
How Do Canada Interest Rates Impact The Toronto Real Estate Market?
When Canada’s fixed interest rates dropped sharply at the end of last year, it was clear that Toronto real estate prices would go up with affordability improving.
But now that fixed interest rates have stayed the same for months, we expect Toronto prices to level out too. And since rents usually follow fixed rate trends, Toronto rents will likely start to level off too after a steady decline since the end of 2023.
To sum it up, the Toronto real estate market is getting more stable. You won’t get rich quick, but the risk of Toronto real estate prices dropping has gone down a lot.
Here's How A Top Investment Property In Toronto Looks Like Today
At a purchase price of $1 million, with $50,000 invested in renovations, you could potentially generate slightly positive cash flow split into 3 units. Plus, with each mortgage payment, you’ll be building equity, and there’s a good chance of sustainable appreciation over time.
This combination sets the stage for great returns on investment and long-term success with a multi-unit Toronto investment property!
What Toronto Real Estate Investment Is Right For You?
Check out our complete Toronto real estate investment guide for all the details and real-life examples. If you’re ready to dive in, just book a call with us!
