Canadians with mortgages and those gearing up for a run at the housing market have plenty of decisions to make after back-to-back interest rate cuts from the Bank of Canada.
The central bank delivered a 25-basis-point rate cut on Wednesday, bringing its policy rate to 4.5 per cent. That feeds into the prime lending rates of major banks in Canada, which are expected to decline to 6.7 per cent in the wake of the decision.
On the mortgage front, some Canadians will immediately see their next monthly payments reduced.
“Those who are most immediately impacted are those who currently have variable-rate mortgages,” says Penelope Graham, mortgage expert at Ratehub.ca.
There are two kinds of variable-rate mortgages to consider, those with adjustable payments and those with fixed costs.
Adjustable-rate mortgages will see monthly payments fall in line with the decision.
Ratehub crunched the numbers for a homeowner who put 10 per cent down on a home worth just under $700,000 on a five-year variable rate mortgage of 5.7 per cent amortized over 25 years.
In that case, a homeowner with a monthly mortgage payment of $4,019 would immediately see their mortgage rate drop to 5.45 per cent and payments lowered to $3,934. That works out to $95 less per month, or $1,140 less annually.
For variable mortgages on fixed payments, the amount Canadians pay won’t change, but the amount that’s going towards paying down the mortgage principal rather than interest charges will grow.
Other loans with variable rates of interest, such as some student loans and home-equity lines of credit, will also see their rates drop after the Bank of Canada’s latest cut.
But fixed-rate mortgage holders won’t see any immediate impact from the change, nor will rates on offer in the market necessarily move in line with the cut. Fixed mortgages are derived from the bond market, so rates here will change when traders have reason to believe the path for the Bank of Canada’s policy rate is headed lower or higher over a particular time frame.
Tiff Macklem, governor at the central bank, did suggest Wednesday that more rate cuts are in the cards going forward as confidence is growing among monetary policymakers that inflation will continue to ease even if rates head lower.
For Canadians who have a mortgage renewal coming up, Graham says the expectations for lower borrowing costs make it a good time to explore options and get a rate hold from a lender for up to 120 days.
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Ottawa resident Jim Fawcett has a mortgage renewal coming up in a year’s time. He told Global News on Wednesday that despite having a bit more bandwidth before his term expires, he’s looking at renewing early to blend his current sub-three per cent mortgage rate with today’s rates in the market.
Fawcett has only a few years left on his mortgage and said he’s looking for “certainty” about what rate he’ll be paying for each of those remaining months.
With uncertainty on the global stage, particularly around the upcoming presidential election in the United States, he said he doesn’t want to risk waiting for another year should the Bank of Canada have to reverse course and mortgage rates head higher again. Macklem on Wednesday cited geopolitical uncertainty as one of the outstanding risks to inflation going forward.
“Instead of waiting a year’s time and having the potential risk of that spiking again, we’d rather just take the certainty now and finish off the mortgage,” Fawcett said.
Graham says this preference for certainty is what makes the fixed-rate mortgage the most popular product among Canadians. But she notes that locking in a five-year fixed rate now ensures that a homeowner is paying today’s elevated rates for the extent of the term.
For that reason, shorter fixed mortgages of two or three years are increasingly popular among homeowners.
“That provides a really nice middle ground in terms of flexibility.… You will know where interest rates have ended up at that point, but it will also protect you from any fluctuations to interest rates during that time frame,” Graham says.
Variable mortgages are typically carrying higher rates than fixed alternatives in the market today. But if Canadians are comfortable with taking on a bit more risk in their monthly payments, she also notes that variable rates can see a homeowner come out on top, provided there are enough rate cuts over the course of their term.
“If you’re feeling very bullish about variable rates, if you think the Bank of Canada is going to be very aggressive with this downward trajectory, then getting on that variable-rate train can make a lot of sense. There might be a big payoff for you there,” she says.
For would-be homebuyers stuck on the sidelines amid higher borrowing costs, Bank of Canada rate cuts can bring them closer to affording a mortgage and breaking into the market.
Graham notes that, after a slow spring housing market, there was a small jump in activity following the central bank’s first rate cut of the cycle in June.
“But I think we’re going to need to see a bit more of a snowball effect in terms of improved affordability before we see people returning en masse,” she says.
Lower interest rates can also put upward pressure on home values and “psychologically fuel buyers,” Graham says, convincing them to jump into the market for fear of missing out on a good price.
Some economists reacting to the Bank of Canada’s decision say a third rate cut is in the cards for September, with the potential for another 50 basis points of easing this year. Macklem himself cautioned that the central bank will be taking decisions one meeting at a time, and future rate cuts will depend on how inflation and other economic data is informing monetary policy.
“Will there be another rate cut in September? What about in December? What about in 2025?” Graham asks. “I think that home buyers are still weighing their options and seeing how this plays out.”
— with files from Global News’ Jillian Piper
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