Depending on where you are in your home ownership journey, a Bank of Canada (BoC) rate cut will be welcome news or a very slight improvement on terrible news.
Each BC cut means slightly lower monthly payments for people with variable rate mortgages, and potential affordability gains for people hoping to enter the market. But people with mortgages dating back to the era of the ultra-low interest rate pandemic face a sharp rise in payments when they renew – an increase that will only be slightly improved by a rate cut.
And that group is a big group: Ina 2024 Financial Stability Report released in May, The BC estimates that “roughly half of outstanding mortgages are held by borrowers who have yet to face higher rates.” Those will be “getting used to sticker shock,” TD Bank chief economist Beata Caranci wrote in a note last week, when they reach a term of “historically low lending rates that are unlikely to they complete again in the absence of a severe recession.”
Those rates could be “twice per cent, 1.5 or 1.75 [per cent] depending on when you got it and you’re renewing now, it could be 4.5 if you go through a fixed rate, or if you go to variable like today, maybe a high five, ” said Jimmy Elamad, mortgage agent and partner at Y Mortgage, Mortgage Alliance. “So you will have paid a shock. Obviously your payments will increase significantly on renewal.”
A recent report from Equifax found that 15 percent of mortgage renewals in 2024 will cost more than $300. The percentage was even higher in Ontario and British Columbia, at about 20 percent, Equifax says.
What a cut would mean for existing mortgages
Banks tend to adjust their prime lending rates the same day the Bank makes a move, says Frances Hinojosa, CEO and co-founder at Tribe Financial Group.
With a variable-rate mortgage, for every $100,000, a 25-base cut shaves about $15 off a monthly payment. On a $600,000 mortgage, the monthly savings would be about $90. With three total cuts of 0.75 percentage points, monthly savings would approach $270.
Fixed-rate mortgages are tied to the bond market, Hinojosa says, so they don’t move as quickly.
“If we hear the Bank of Canada is reducing the rate by a quarter of a per cent, that doesn’t mean your fixed interest rates will decrease by the same amount, as the variables do,” she said. “They are not directly related. You would have to wait and see how it would affect the bond market, and therefore the cost of funds and the pricing of fixed mortgage rates.”
Elamad says bond markets are likely already pricing in an interest rate cut in September, so a cut itself is unlikely to change fixed rates much. “However, the information in this meeting could push bonds lower because they could say, ‘Hey, we’re going to cut rates again.'”
What would be the cut for people hoping to buy
Canadian housing affordability improved slightly in July as a result of the BoC’s rate cuts, a Ratehub.ca report found. Although the market could become more competitive with prices rising as a result of further cuts, home sales have so far remained slow.
Hinojosa says the current context presents a “great opportunity” for someone looking to buy.
“Yes, I understand housing prices are still up,” she said.
“However, it is much more of a buyer’s market today. So it gives a first-time home buyer that delay and that ability to be really strategic about the property they’re looking at buying.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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