In the real estate world, timing is everything—or is it? Many prospective buyers hold off on purchasing a home, hoping that interest rates will drop to make their dream home more affordable. While this might seem like a sound strategy on the surface, waiting for lower rates can often end up costing more in the long run. Here’s why:

1. The Inverse Relationship Between Interest Rates and House Prices

When interest rates drop, house prices tend to rise. Why? Lower rates often spur buyer confidence, increasing demand for homes. As demand increases, so do prices.

If you wait for rates to fall, you may find that the savings in your monthly payments are offset—or even surpassed—by the increased purchase price of the home. For example, a $500,000 home purchased at a 6% interest rate might cost less overall than the same home priced at $550,000 with a 5% interest rate. The higher price, combined with additional costs like land transfer taxes and insurance, can quickly eat into any perceived savings.

2. The Immediate and Delayed Effects of Interest Rate Changes

The Bank of Canada (BoC) posted rate directly impacts variable or adjustable-rate mortgages immediately. For these types of mortgages, any rate increases or decreases by the BoC means a corresponding change in your monthly payments. This can make variable-rate mortgages more volatile in times of fluctuating rates.

Fixed-rate mortgages, however, are not directly influenced by the BoC’s rate changes. Instead, they are tied to the bond market, specifically government bond yields. When bond yields rise, fixed mortgage rates typically follow suit, and when yields fall, fixed rates decrease.

This delayed reaction happens because bond yields are influenced by broader economic trends, such as inflation expectations and investor sentiment, rather than the BoC’s rate changes alone. For buyers, this means that even if the BoC reduces rates, fixed-rate mortgages might not immediately become more affordable.

3. Increased Competition Drives Prices Higher

Lower interest rates often invite more buyers into the market. With more people looking to purchase homes, competition heats up, leading to bidding wars and pushing prices higher.

In contrast, during periods of higher interest rates, fewer buyers are competing, giving you more negotiating power. For those ready to buy, this can mean less pressure and potentially better deals.

Paying Off Debt Matters More Than Rates

While interest rates do affect your monthly payments, your overall financial readiness to buy a home is even more critical. Paying off debt and improving your credit score can unlock better mortgage options, regardless of current rates.

By reducing your debt-to-income ratio, you not only improve your borrowing power but also position yourself to take advantage of opportunities in the market, whether rates are high or low.

5. Time in the Market Beats Timing the Market

Trying to time the market—whether in real estate or investments—can be a losing game. Historically, homeowners who buy and hold their properties for several years see significant returns, even if they purchase during periods of higher interest rates or higher house prices.

The key is getting into the market as soon as you’re financially ready. Homeownership builds equity, provides stability, and lets you benefit from long-term appreciation. Even if interest rates are higher initially, they can often be refinanced when rates drop. However, you can’t retroactively lock in a lower home price.

The Bottom Line

Waiting for lower interest rates might feel like playing it safe, but it often leads to missed opportunities. Rising home prices, increased competition, and the potential to start building equity today mean it’s often better to buy when you’re ready rather than waiting for the “perfect” moment.

Understanding how the Bank of Canada rate and bond market impact mortgages is key to making an informed decision. If you’re unsure how current rates affect your buying power, the REAL Collective team is here to help. We can guide you through the options, strategies, and nuances of today’s market to find the home that fits your needs and budget.

For more valuable real estate related tips, you can check out the REAL Collective Podcast on iTunes, Spotify or YouTube.