How low can rates go: Navigating a long-term low rate environment

Lori Sartor and Eric Haslett
  • Mar. 4, 2021

In March 2020, at the outset of the COVID-19 pandemic, the Bank of Canada reduced the prime interest rate from 1.75 per cent to 0.25 per cent. This marked its lowest point since it dropped to this rate in 2009.

Canada’s central bank has maintained its commitment to this current rate for the foreseeable future, meaning it is more than likely the low rates we saw in 2020 will persist throughout 2021.

With this reality, it’s important to think about what a prolonged low-rate environment means for today’s real estate industry and what impact this might have on Canadian buyers in the future.

A thriving real estate market from coast-to-coast

Many early forecasts predicted the impact of COVID-19 on real estate would be dire.

In the earliest stages of the pandemic, there was indeed a slowing in residential sales volumes, induced by consumer uncertainty, lockdown measures and restrictions on open houses, which deterred sellers from listing and buyers from making offers. Fortunately, the gloomy predictions about a real estate implosion did not come to fruition.

By mid-year, it became apparent that rock-bottom borrowing costs (rates as low as two per cent for a five-year fixed mortgage) were keeping prices resilient. Buyers who had adopted a “wait-and-see” attitude quickly began to fear they were being left behind.

Demand multiplied across almost all residential housing segments.

Rural and suburban demand grew quickly as many buyers transitioned to remote work and were no longer required to commute to a physical office.

Sales of single-family homes climbed as buyers sought more space and safer alternatives to high-rise condominiums with limited options for physical distancing. We also saw cottage country flourish, with price gains of nearly 30 per cent in some regions across Ontario.

Refinancing also became increasingly popular among current homeowners who took advantage of the record low rates as their current mortgage terms ended.

So, the question remains – how sustainable are these trends?

Potential dangers of a prolonged low-rate environment

While these trends have been positive for many property buyers looking to get into the market, they also highlight some areas of concern for prospective, new and current homeowners.

One of the most significant areas of concern is over-extension. Low rates promote individuals borrowing  more money. With more Canadians purchasing multiple properties, we could see many more issues surrounding debt.

Additionally, many homebuyers, particularly first-time homebuyers, are purchasing homes under ideal circumstances – working full-time and with record-low interest rates – assuming there will be little to no change to that reality.

However, with uncertainty surrounding how rates could fluctuate in the coming years, it is prudent to remain cautious and to consider what might happen when the environment changes.

It’s also important to consider the real estate landscape when the pandemic is behind us and how our current low-rate environment could contribute to unrealistic expectations.

Over the past decade, the prime interest rate has fluctuated slightly but has not exceeded five per cent. However, as we look forward and Canada emerges from this unprecedented time, it’s plausible to think that the Bank of Canada will work toward raising policy rates to the ‘neutral range’.

While this may not affect those who remember higher rates in the past – and who have factored in the likelihood they will eventually rise again – higher rates could come as a real shock to new homebuyers who have never experienced this.

For those who have been able to take advantage of these low rates for their first home purchase, once the fixed term is over, many may be taken by surprise when they go to refinance or purchase a new home.

Rates at or above five per cent could prove challenging for individuals who are accustomed to making payments at two or three per cent.

Navigating a low-rate environment

Understanding the current and future impacts of a prolonged low-rate environment may be overwhelming, but it’s important for homebuyers to acknowledge how fluctuating rates can impact their mortgage.

While rates aren’t likely to skyrocket in the near term, it’s critical that real estate professionals continue to closely monitor trends in the market to provide the best advice possible for all clients.

At FCT, we’re invested in providing real estate professionals and their clients with the confidence to navigate the current rate environment and all rate environments to come.

By understanding the impact and risks of low-rate environments, current and prospective homebuyers – particularly those within the COVID-19 era – will be better equipped to make educated decisions.



Lori Sartor and Eric Haslett are vice presidents at FCT. As vice president of residential solutions, default solutions and marketing, Lori is responsible for strategic leadership and product innovation of…

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Lori Sartor and Eric Haslett are vice presidents at FCT. As vice president of residential solutions, default solutions and marketing, Lori is responsible for strategic leadership and product innovation of…

Read more




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