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Are Lower Interest Rates Helping Offset Lower Rents?

There's no question rents are down in Toronto. But lower interest rates are helping ease the pain for a lot of landlords.

Did your high school grade your classes on a curve? I went to a pretty strict high school and every class gave a numeric grade instead of letters. In fact, a couple years before we hit OAC (they don't have OAC anymore but it was basically grade 13), we were shown the range of average grades that each university program was looking for in order for an applicant to be considered. I took Computer Engineering at the University of Waterloo and I pretty much knew, to the number, what overall average I needed to get in - or at least what number I had to make sure I didn't drop below in order to still be considered. I always rocked math and science, but English and other "non math" courses always brought down my average. I never really liked courses where there wasn't a right answer. I mean, who's to say that my final essay in high school English was only "81%" perfect? It always felt so subjective. With math, there was always a right answer. I liked that. Math never lies. I vaguely remember one of our high school teachers try to grade his class on a curve for one exam. I didn't know what that actually meant but apparently your actual grade on the exam didn't matter - your grade would be adjusted relative to how everyone in the class did. If you got a 65% on the exam but the class average was 55%, you got bumped up to an 80%, or something like that. That never sat well with me because I was being judged not objectively based on the exam but subjectively based on how my classmates did. Anyway, that experiment didn't last very long.

The rental market today is almost like grading on a curve. As a landlord, yes you are getting lower rents but it's all relative. Here's why.

Rents in TO are down. A lot. We can go back and forth on whether it's due to AirBnB restrictions adding supply to the market or whether it's because nobody "needs" to be downtown and close to work right now, or a combination of the two, but there's no question that it hasn't been this "cheap" to rent a condo in Toronto in literally years.

I do a lot of rentals and I can tell you first-hand that my tenant clients are getting deals that I haven't seen in 3-4 years. And my landlord clients are having to settle for rents they haven't seen in 3-4 years. But here's something I found interesting - there are a lot of landlords who are willing to take lower rents instead of selling. It's impossible to quantify this number but again, from first-hand experience through all my landlord investor clients, none have sold. Some have come close, I'm not gonna lie, and I've had conversations with more than a few about the idea of selling, but after doing some math and talking through why they bought their units in the first place, all have agreed that taking lower rent and riding out this pandemic is the smarter option.

So let's talk about the math. It can't be easy for a landlord who was getting $2200/mo in rent as recently as a year ago to suddenly have to settle for $1950/mo or even less today if their tenant decides to move back home to mom and dad to save money while they work from home for at least the next several months. No doubt, that sucks for a landlord. But if there was one saving grace, it's interest rates.

Now if you're a condo investor sitting on a 5-year fixed rate mortgage that still has 3 years left to go, it's going to be painful from a cashflow basis if your tenant decides to move and you're stuck taking in $300/mo less in rent from a new tenant. That's going to sting. But if you are like a lot of investor clients, you were probably advised to go variable instead.

And here's how that's easing the blow to a lot of landlords:

Let's say you bought a $550k condo as an investment exactly 2 years ago and took out a $400k mortgage, and chose the option for a variable rate mortgage. Your rate at the time would likely have been somewhere around 2.7% (or prime less 1%, give or take depending on your bank, when exactly you purchased, etc). The Bank of Canada was in the process of raising rates at this point and prime was 3.7% in the fall of 2018, raising to 3.95% on Halloween 2018. Boo! It then stayed there until March 2020. That would have made your mortgage payment $1832/mo on a 25-year amortization.

Add in condo fees of around $400/mo, property taxes of $200/mo, and your total carrying costs would have been around $2432/mo. Back then, a condo around that price would likely rent for around $2100-$2200/mo, making your total cash flow somewhere between -$232 and -$342/mo. Yes, you had negative cashflow and for anyone who missed my post from a couple years back on why investors in the condo market are fine with negative cash flow, check it out here for a recap.

Now let's fast forward to today, in the middle of this pandemic, and your tenant says he's moving back home to save some money. You call me and ask what I think you could rent your unit for today and I take a deep breath and say "Let's try to get you $1900/mo". Then I'll wait for the inevitable silence on the other end of the line when I know you'll say "Can we try for $2000/mo?" And I'll say no because not only are there 7 other units in your building for rent right now, but there are 42 other similar units available within a 3 block radius. Then you'll eventually agree and we'll hit the market at $1900/mo.

But what's happened to interest rates?

To basically save the economy from collapse, the Bank of Canada effectively cut overnight rates to 0%. And while that doesn't mean your variable rate mortgage went to 0% (wouldn't that be something!) it does mean that prime rate, which is what your variable rate mortgage is based off, did drop. A lot. Prime rate right now is 2.45%, which means that your prime less 1% variable mortgage is now costing you a paltry 1.45%. It also means that your monthly mortgage payment has dropped from $1832/mo down to around $1590/mo. That's a savings of $242/mo, just on a cash flow basis. And your mortgage balance is getting paid down way quicker because far less of your payment is going towards interest. It's a double bonus. Go play with a mortgage calculator online and check out the numbers. I've been doing it all morning. It's fascinating!

So let's look at that investment condo again, now with your new tenant in place and your lower mortgage rate: your total carrying costs are $1590/mo + $400/mo + $200/mo = $2190/mo. And your rent is now $1900/mo, leaving you with a monthly cash flow of -$290/mo....basically putting your cash flow in the same position you were in when you first bought the condo, getting much higher rent. This doesn't even factor in that your mortgage balance is actually being paid down faster now, even with the lower payment.

This is how lower interest rates are saving landlords and, in my opinion, why more and more landlords are choosing to hold on to their investment properties and accept lower rents rather than sell (assuming they still believe in the long-term potential of Toronto and the eventual resurgence of the core). Of course, this really only benefits investors in variable rates but I'm sure some mortgage broker out there can pull some stats on how many investors typically choose variable over fixed and we'd get a complete picture of why so many investors are taking lower rents in stride (and to be fair, they really have no choice in this market).

At first glance, lower rents seem to totally crush landlords. But math always comes to the rescue.

Have you checked out my previous blog posts?

If you have a comment, feel free to leave it below. And remember, if you haven't already, please "like" my Facebook page, follow me on Instagram and check back regularly!

Your Toronto condo lover,

Adil Dharssi Sales Representative iPro Realty Ltd, Brokerage Direct: 647-223-1679 (call/text) Email:

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