Rising mortgage rates eroded housing affordability in August

Fixed mortgage rates ticked up slightly in the month of August, eroding affordability conditions for homebuyers in a number of real estate markets.

It got tougher to afford a home in seven out of 13 major Canadian cities over the course of the month, according to the latest affordability report from Ratehub.ca. The monthly analysis looks at how shifts in mortgage rates and the mortgage stress test, coupled with changes in real estate prices, impact affordability conditions in real time. This is illustrated by the amount of income a homebuyer would need to earn to qualify for a mortgage on the average-priced home in their city, as well as the corresponding monthly mortgage payment.

Rising borrowing costs were largely responsible for the decline in affordability across much of Canada; the average five-year fixed mortgage rate used by the study rose to 4.49% compared to 4.40% in July with the stress test – which requires borrowers to tack an additional 2% onto the contract rate they receive from their bank to qualify for their mortgage – rising to 6.49%.

Uneven price growth led to mixed affordability across Canada

Home prices, meanwhile, were a mixed bag; soft summer home sales and rising inventory in some markets led to lower average prices, which offset higher rates in those cities.

This was especially evident in Victoria, which saw the largest improvement in affordability due to an average real estate price drop of $13,600 to $881,000. This resulted in borrowers needing to earn $1,212 less to buy a home in that market.

Vancouver ranked second for improved affordability, with the average home price declining by $14,900, and required income by $1,020. However, at an average price of $1,150,400, the west coast city remains the most expensive market in Canada.

The third and fourth-place markets were both based in Southern Ontario, which has experienced a pronounced downturn in sales over the spring months, and only tepid recovery throughout the summer. Hamilton ranked third, with the average home price dipping by $9,700 to $754,000, and Toronto fourth, down $11,300 to an average of $969,700. The required income to purchase a home decreased by $660 and $640 in each, respectively.

August 2025: How much did you need to earn to buy a home in Canada?

This report is for illustration purposes only. Data is based on a mortgage with a 10% down payment, 25-year amortization, $4,000 annual property taxes and $150 monthly heating. Mortgage rates are the average of the Big Five Banks’ 5-year fixed rates in July and August 2025. Average home prices are from the CREA MLS® Home Price Index (HPI).

Will home affordability continue to improve in Canada?

While mortgage rates rose in August, the borrowing landscape has eased somewhat in September, which should pave the way for easier buying conditions in the fall housing market. Both fixed and variable mortgage rates have trended lower thus far during the month. 

Variable costs have decreased following the latest rate cut from the Bank of Canada on September 17, which reduced its trend-setting overnight lending rate – which influences lenders’ prime rates – by a quarter of a percentage point. As a result, the lowest five-year variable mortgage rate available in Canada is 3.7%, compared to 3.95% prior the rate announcement.

Fixed mortgage rates have also dropped in response to lower bond yields; in the weeks leading up to the BoC’s decision, investors were increasingly pricing in the likelihood of a central bank cut, both in Canada and in the US. Investors also reacted to promising inflation data, as well as evidence that the Canadian job landscape is starting to weaken – all of which pave the way for more stimulus from the central bank.

When investors increasingly buy bonds, the yields of those investments drop, as they require a lower risk premium to be attractive. This in turn gives consumer banks the room to pass discounts down to their fixed mortgage rate products. As of today, the five-year Government of Canada bond yield remains in the 2.7% range, and the lowest five-year fixed-rate mortgage option has been lowered to 3.94%.

Whether or not more rate cuts are to come from the BoC will hinge on upcoming economic data; should further weakness be apparent in data sets such as retail sales and GDP, it will compel the Bank to ease conditions further for consumers. 

In the press release that accompanied its most recent rate announcement, the Bank alluded that future rate cuts are possible in its next rate decisions on October 29 and December 10, but that it will be paying “particular attention” to how Canada’s exports evolve in the face of tariffs, and the resulting impact that has on consumer and business spending.

“With a weaker economy and less upside risk to inflation, Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks,” states the central bank’s press release. “Looking ahead, the disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity.” 

Also read:

• Canadian home sales hit highest August since 2021
• Bank of Canada cuts target interest rate to 2.5% in September announcement
• Housing affordability in Canada
• Lower home prices and mortgage rates improved buying conditions in July