Why Lower Interest Rates Alone Won't Fix Housing Affordability in Canada

For Canadians trying to buy a home, the conversation about affordability often comes back to mortgage rates.

If rates came down, wouldn't homes simply become more affordable? Partly. But a new Bank of Canada discussion about Canada's housing market highlights why the answer is more complicated, and why home buyers should look at affordability differently. On October 1, Bank of Canada Senior Deputy Governor Carolyn Rogers described housing affordability as one of Canada's most pressing economic challenges. She also explained why the central bank's most powerful tool, its policy interest rate, cannot solve the problem by itself.

For Canadian home buyers and homeowners, understanding that distinction can lead to better mortgage decisions.

Interest Rates Affect Affordability, but They Don't Control It

Mortgage rates clearly matter.

When borrowing costs increase, the payment required to carry the same mortgage generally increases. Higher qualifying rates can also reduce how much mortgage a buyer can obtain. When borrowing costs decline, the opposite can occur. That makes interest rates an important part of determining how much mortgage you can afford. But there's another side to the equation. Lower borrowing costs can encourage more people to enter the housing market. If the number of buyers increases faster than the supply of available homes, stronger demand can put upward pressure on prices. That can give buyers a lower mortgage rate while simultaneously making the property itself more expensive. Affordability isn't determined by either number in isolation.

Why the Bank of Canada Can't Target Home Prices

The Bank of Canada's primary monetary-policy tool is its policy interest rate. The problem is that Canada doesn't have one interest rate for housing and another for everything else. When the Bank changes its policy rate, the effects move throughout the economy. Higher rates can reduce borrowing and spending, including demand for housing. But they can also increase borrowing costs for existing homeowners with variable-rate debt and affect borrowers as mortgages renew. Lower rates can reduce certain borrowing costs and stimulate economic activity. But they can also encourage additional housing demand. The Bank therefore describes interest rates as too blunt a tool to target housing affordability directly. Its stated contribution is maintaining low and stable inflation rather than trying to establish a particular level for Canadian home prices.

Mortgage Rates Aren't All Controlled the Same Way Either

There's another important distinction for consumers. The Bank of Canada does not directly set the mortgage rate your lender offers you. Variable mortgage rates are generally connected to a lender's prime rate, which is heavily influenced by changes in the Bank of Canada's policy rate. Fixed mortgage rates behave differently. They're influenced significantly by Government of Canada bond yields, lender funding costs, competition and other market factors. That's especially relevant right now because Canadian fixed mortgage rates have been moving higher as bond yields have increased. It also explains why fixed rates can move between Bank of Canada announcements. Consumers comparing their choices should therefore understand how fixed and variable mortgages work instead of assuming every mortgage rate follows the Bank of Canada in the same way.

Home Price + Financing Cost = Only Part of Affordability

For a household, affordability is broader still. Imagine two buyers who qualify for exactly the same mortgage. One has no consumer debt, substantial emergency savings and predictable household expenses. The other has vehicle payments, revolving debt, childcare costs and very little savings left after closing. A lender's mortgage calculation may account for several of those obligations when determining qualification. But mortgage qualification still isn't the same thing as a household financial plan.

Your actual cost of homeownership can include:

• mortgage principal and interest;

• property taxes;

• home insurance;

• utilities;

• condominium or strata fees where applicable;

• repairs and maintenance;

• future major home expenses; and

• the savings you want to continue making after buying the home.

That is why a buyer's maximum mortgage approval should not automatically become their purchasing budget. Before shopping seriously for a property, a mortgage pre-approval can help establish a realistic starting range, while your own household budget can help determine whether that range is actually comfortable.

Housing Supply Matters More Than Many Mortgage Discussions Acknowledge

One of the central themes of the Bank of Canada's latest comments is supply. Interest rates can influence demand for homes. They cannot build them. The Bank cannot use its policy rate to rezone land, approve a development, construct infrastructure or accelerate a municipal permit. That means improving Canadian housing affordability over the longer term involves factors outside monetary policy. More housing supply, appropriate infrastructure, planning decisions and financial-system policies all form part of the equation. This doesn't mean every region of Canada has the same housing problem. Housing markets are local, and supply, demand, prices and economic conditions can differ substantially between communities. It does mean that waiting for the Bank of Canada alone to "fix" housing affordability misunderstands what monetary policy can accomplish.

What Does This Mean If You're Buying a Home?

It means you don't necessarily need to wait for Canada's entire housing market to become "affordable." You need to determine what is affordable for you. Start with your household rather than a national forecast.

How much can you comfortably spend each month?

How much cash will remain after your down payment and closing costs?

Could your budget absorb unexpected home repairs?

What happens if borrowing costs are different when the mortgage renews?

How stable is your income?

What other financial goals need to fit alongside the mortgage?

Those questions can be considerably more useful than trying to predict exactly where rates or home prices will be next year.

What If You're Already a Homeowner?

The same principle applies. If your mortgage is approaching maturity, don't treat the renewal decision simply as a bet on interest rates. Use the opportunity to review your mortgage before renewing. Look at your remaining balance, amortization, payment, available term choices, fixed and variable options, prepayment privileges and your plans for the property. Your financial circumstances may be very different from when you arranged the mortgage several years ago. The objective isn't to predict the market perfectly. It's to structure the next mortgage term around the financial circumstances you actually have.

Affordability Is Personal Even When the Problem Is National

Canada's housing-affordability challenge is much bigger than mortgage rates. Home prices matter. Housing supply matters. Income matters. Debt matters. Mortgage qualification matters. Taxes and ongoing ownership costs matter. And yes, interest rates matter too. But no single one of those variables tells you whether a particular home and mortgage are affordable for your household. That's why the most productive mortgage conversation usually begins with your finances rather than an interest-rate prediction.

You can explore additional Canadian mortgage information and resources, or find a Haystax Mortgage professional if you'd like help working through what the numbers could mean for your circumstances.