Thinking about adding another property to your real estate portfolio? Maybe you have that down payment ready, but getting a mortgage is more challenging than you thought. 

Plus, interest rates are quite high as we leave 2022 behind. 

Your $2,800 monthly mortgage payment got bumped up to almost $3,000 with the Bank of Canada’s 5.95% prime rate, not counting all your other home expenses. And that number is sure to increase in the very near future. Just December 7th, the Bank of Canada increased their policy rate again to 4.25%, which will trigger the prime rate increasing to 6.45%. 

And that’s assuming your application is as smooth as a regular-income banker, which it might not be. So let’s walk through Canada’s mortgage interest rates in the last few years, how they affect investors, and how you can work around them. 

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What are interest rates like in Canada right now?

As of December 2022, the Bank of Canada’s prime rate is 5.95%. “Prime” is for “prime borrowers.” That means only the most creditworthy, attractive buyers achieve the prime rate. 

But if your credit score is a little lower than stellar? Or your debt-to-income ratio is stretched with other mortgages? You might have regular income, but you won’t get the prime rate. Expect a slightly higher mortgage rate if you obtain a fixed-rate (more stable) mortgage. 

Just to put things in perspective, the Bank of Canada’s prime rate was 2.45% just two years ago in 2020. 

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Should I still invest in real estate when interest rates are high?

If you can do it, we’d recommend it. High-interest rates won’t remove the equity and appreciation you reap with real estate. Plus, how do you explain 28% of the American housing market being bought up by investment firms? Experts predict the same thing happening in Canada soon. 

High interest rates are historically and currently met with two additional domino effects: 

• Lower housing prices
• Less competition

In other words, an investor’s market. If entire investment firms see opportunities to invest, so should you. Let’s explore how.

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Less competition

If you invested in real estate in late 2020 or 2021, you must have fought tooth and nail for that home. 

Why? The Toronto market was riddled with bidding wars. A house would receive upwards of 20 offers, with the winning bid, in some cases, hundreds of thousands of dollars above the asking price. 

The reason for this is simple: low interest rates. The GTA’s entire middle class went on a buying spree, aiming to take advantage of low interest rates which means cheaper borrowing ability. Mortgages never seemed so attainable, prompting heightened competition. 

However, these conditions weren’t conducive to the savvy real estate investor. Only a homebuyer who saw the purchase as a home could gain something by paying above asking (or above the home’s worth) in a bidding war. If you overpaid for an investment property, refinancing soon may not be worthwhile — the appraisal won’t offer you more leverage if it comes back lower than what you paid for a property. 

Those peak levels of competition have now dwindled. The average number of homes sold in October 2021 versus October 2022 has dropped. People aren’t approved for a mortgage as quickly as before with the recent interest rate hikes, so they aren’t buying as much.

This offers a real estate investor a smoother buying path: Less bidding wars, and ideally, lower home prices. 

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Lower prices

Don’t get us wrong; the housing market in Toronto is still expensive. With the average condo selling for nearly $775,000, we certainly can’t say prices are low. 

But you can get away with paying less now than before, when interest rates were lower and competition was higher. How? 

Enter the “stink bid” — a purchase offer so offensive that a seller might not give you the time of day. However, today’s real estate landscape is a bit barren for sellers — high interest rates scare away potential buyers.. The seller doesn’t have a bidding war to sample, so your stink bid might garner a steal. Plus, they might be desperate to sell if they can’t afford their new, high-interest, variable-rate mortgage.  

In other words? You’re more likely to get away with spending $715k for that $775k condo now, than before. 

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