Bank of Canada Interest Rate Good or Bad News for Real Estate Investors

The Bank of Canada increased it's interest rate this week. Is this good news, or bad news for real estate investors?

The Bank of Canada increased it's benchmark rate to 1.75%, which means that the new prime rate goes up from 3.7% to 3.95%. An increase of a quarter point. There's good news, and bad news, in this increase.

The good news, if you're a fixed mortgage holder, there's no change. Your mortgage is not going to be impacted. Your cost of borrowing is the same. There's no impact on your cash flow.

The bad news, if you're a variable mortgage holder, your payment has gone up. I'll give you an example. Let's say you have prime minus 0.6%, so it was 3.7% minus 0.6%, so 3.1%, that has now gone up to 3.35%. It's gone up by a quarter point. Every $1000 that is amortized over 30 years, that payment goes up by $14. If you have a $300,000 mortgage, your variable mortgage has increased by $42 a month.

That is bad from a cash flow perspective because now your mortgage payment is higher, but on the flip side, because this is a mortgage for investment purposes, the interest portion is a tax deduction. There's the good, and the bad, if you're a variable mortgage holder. However, if you're a fixed mortgage holder, it really doesn't impact you until you renew, whenever your mortgage renewal comes up.

The other positive out of a higher interest rate is that some of these potential buyers will have a hard time qualifying for these mortgages, which will put some of these buyers into the rental market. We'll have a higher demand for rentals with a larger pool of tenants looking for the same number of rental units in the city. We all know there's a severe shortage of rental housing in the city of Toronto.

By having more demand, this will push rental prices higher. From a real estate investor perspective, having stronger demand will potentially lead to higher cash flow, or higher rental prices, which will improve the cash flow of these rental units, and hopefully offset the increase in mortgage payments.

For more information or if you are looking to invest, feel free to connect and happy investing.