Interest rates have become a national obsession in 2022. It’s certainly been the primary focus of Toronto real estate purchasers this year. And really, who can be critical of anyone laser focused on interest rates right now? Buyers have had their purchasing power eroded as interest rates rise up. To be more specific, mortgage rates have gone up from 2.99% in February 2022 to 5.45% or so in August 2022. And this certainly has some impact on your purchasing power.

Let’s look at how this change in mortgage rates have impacted a buyer of a detached house in the GTA from the peak of the Toronto real estate market in the winter until the end of the summer in August. Detached houses have seen the biggest declines in value of all the property types this year, particularly when you include the entire GTA and not just the old city of Toronto. We are in the upside down of the Covid real estate market where the property types and locations that increased the most during Covid are now down the most with the rise in interest rates. Condos, row houses and semis have not fallen in price as much as detached houses. Toronto prices on all property types seem to have fallen less in the city than in the suburbs. Oddly, detached houses have gone up in price from July to August. An unusual blip in any year. Still, prices were down from February to August. The average detached house in February 2022 in the GTA was $1,797,203. In August of 2022 it was $1,379,700.

If you factor in the different interest rate payments in each time of the year, you would pay a monthly payment for a 30 yr amortization with a 20% down payment of $6040/month in February 2022 and $6,083 in August 2022.

So for many when you factor in the increased rate hikes, it’s roughly the same cost. So, are the price declines really a benefit if you have to pay more in interest? Well, yes it is. There are some advantages to the buyer who buy a detached house (or any property) now instead of back in February of this year. Let’s look at how the interest rates have worked in the buyer’s favour.

SHRUNKEN PRINCIPAL PAYMENT

Though more of your money is going to interest rate payments, your principal payment is smaller. For a house that cost $1,797,203 in February 2022, you would require a down payment of roughly $359,411 with 20% down. For August 2022, it would cost $275,940. That has a few advantages. One, you will need less of a down payment to buy the house that you would like. In other words, you could use your money for other things besides the down payment like renovations that you would like to do before you move in. It also improves the timing for the buyer. For those buyers saving up their dollar to buy a property of any kind, you will be able to save enough money for a down payment sooner than before. Though higher interest rates have reduced a buyer’s purchasing power, you can possibly get in earlier now that a smaller down payment is required and prices are lower. You may also put more down today, and have a smaller mortgage or pay less mortgage insurance if you are paying less than 20% on your deposit.

LESS UP FRONT TAXES

By far the largest payment for buying a new property, aside from the property itself, has to be the cost of the land transfer tax for Toronto and Ontario. A house that cost $1,797,203 in February 2022 would have a combined Toronto/Ontario land transfer requirement of $64,838. A house that cost $1,379,700 in August of 2022 would require $48,138 in land transfer taxes. The savings are not as big as the smaller down payment, but it is worth mentioning, and it certainly saves you money.

END OF STRESS TEST ON THE HORIZON?

To be clear, this hasn’t happened yet, but please indulge me a little. This is a long shot, but I am hearing early rumblings/protests that the stress test needs to be taken out. Before we get into this, let’s refresh ourselves with how the stress test works. To allow buyers to more easily absorb higher interest rates, all buyers will have to qualify through a lender with a stress test. In other words, buyers must qualify for a mortgage based on the current interest rate at the greater of 5.25% or the buyers’ actual mortgage rate +2%. These days, with interest rates climbing, that would mean a buyer would need to qualify at +2% of their mortgage.

Looking back, it turns out it was a smart move to create stress tests in 2016 ( for uninsured mortgages) and in 2018 (for all mortgages) to make sure buyers can absorb a rate hike because that’s exactly what needed to be done in 2022. Many buyers who had lower rates when they purchased earlier this year, are now able to withstand the higher rates of today because they were stress tested. Though we can’t say for sure when the interest rate hikes will end, it is anticipated that we will have one or two more smaller rate hikes to come, and then we may be done. Of course, we may not be done, and we may see more hikes next year, but if inflation continues to level off and hikes come to an end, we may begin to question: Do we need a stress test anymore? What if rates begin to fall next year? The removal of the stress test may be more of a real possibility in 2023 ore further in the future. And if that’s the case, it may be easier to qualify for a larger mortgage in the future if you don’t need to qualify with that additional 2% plus your rate.

There are other advantages to buyers in this current market that I have outlined in previous blog posts like less competition for properties and the ability to negotiate on price with some properties. Also, the decline in prices have not been as great for detached homes in Toronto ( as opposed to the entire GTA) as well as condos, rows and semis in the city as well.  Be warned that there are still bidding wars and bully offers, though there are fewer than before this current market. Just make sure you have an informed real estate agent who has the right strategies required for different submarkets.

Thinking of buying or selling? Contact me!

David Coffey, Sales Representative

416-465-7527 | david@davidcoffey.ca
Bosley Real Estate Ltd Brokerage
169 Danforth Ave, Toronto ON M4K 1N2