June 11, 2024

How the Recent Interest Rate Cut Impacts Canadian Homeowners and Homebuyers

How the Recent Interest Rate Cut Impacts Canadian Homeowners and Homebuyers

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The Bank of Canada’s recent decision to cut interest rates by 0.25 percentage points has sent ripples through the Canadian housing market. For homeowners and prospective homebuyers, this rate cut could have significant implications on their monthly mortgage payments and overall housing affordability. In this article, we’ll explore the impact of the rate cut, provide insights from experts, and offer guidance on navigating the current market conditions.

Impact on Existing Homeowners with Variable-Rate Mortgages

If you’re an existing homeowner with a variable-rate mortgage, the recent interest rate cut is good news for your wallet. A variable-rate mortgage is a type of mortgage where the interest rate fluctuates based on the prime rate set by the Bank of Canada. When the prime rate goes down, your mortgage rate and monthly payments also decrease.

According to a report by Zoocasa, an online real estate platform, homeowners across major Canadian cities can expect to see significant monthly savings on their variable-rate mortgages. Here’s a breakdown of the estimated monthly and annual savings:

CityAverage Monthly SavingsAnnual Savings
Ottawa$286$3,432
Toronto$155$1,860
Calgary$155$1,860
Regina$75.60$907

As you can see, the savings can be substantial, especially for homeowners in cities with higher average home prices like Ottawa and Toronto.

If interest rates continue to drop in the future, homeowners with variable-rate mortgages could see even greater savings. This could potentially allow them to pay off their mortgages faster or free up funds for other expenses or investments.

Impact on New Homebuyers

For those looking to enter the housing market, the recent interest rate cut could provide a much-needed boost to affordability. Lower interest rates translate to lower monthly mortgage payments, making it easier for prospective homebuyers to qualify for a mortgage and potentially purchase a more expensive property.

However, it’s important to note that the impact of lower interest rates on housing affordability may be offset by increased demand and competition in the market. As Carrie Lysenko, CEO of Zoocasa, points out:

“With lower lending rates, prospective buyers will be motivated to get off the sidelines, ultimately leading to more sales activity and the potential for an increase in prices. Now is an excellent time to get off the sidelines, before the competition gets too fierce, explore your options and take advantage of the greater negotiating power you have with the current surge in inventory.”

For new homebuyers, it’s crucial to act quickly and get pre-approved for a mortgage. This will give you a better understanding of your budget and purchasing power, allowing you to make informed decisions in a competitive market.

Fixed vs. Variable-Rate Mortgages: Which is Better?

One of the biggest decisions homebuyers and homeowners face is whether to opt for a fixed-rate or variable-rate mortgage. With the recent interest rate cut, this decision becomes even more crucial.

Fixed-rate mortgages offer stability and predictability, as the interest rate remains constant throughout the mortgage term, typically ranging from 1 to 10 years. This means your monthly payments won’t fluctuate, making it easier to budget and plan your finances.

Variable-rate mortgages, on the other hand, are tied to the prime rate set by the Bank of Canada. When interest rates go down, your monthly payments decrease, but when rates rise, your payments increase accordingly.

So, which option is better in the current market conditions? Mortgage experts have differing opinions.

Ryan Sims, a mortgage broker and rate analyst, believes that fixed-rate mortgages currently offer better value. He explains:

“For the variable to make sense, you would need to see another five cuts [in addition to the June rate cut] to break even. Will we get five cuts? Probably, however the timing may take a lot longer than people realize.”

Sims suggests that if you’re comfortable with the payment and value predictability, a fixed-rate mortgage may be the better choice in the current environment.

On the other hand, Dave Larock of Integrated Mortgage Planners argues that variable-rate mortgages could be a good option if we’re near the peak of the current interest rate cycle. He writes:

“There is no way to know for sure where rates are headed, but if we are, in fact, near the peak of the current interest-rate cycle, the odds should favour variable-rate mortgages.”

Ultimately, the decision between a fixed-rate or variable-rate mortgage depends on your individual circumstances, risk tolerance, and financial goals. It’s advisable to consult with a mortgage broker or financial advisor to determine the best option for your specific situation.

Future Interest Rate Outlook

While the recent interest rate cut provides relief for homeowners and homebuyers, it’s important to consider the potential future direction of interest rates. The Bank of Canada’s decisions on interest rates are influenced by various factors, including:

  • Inflation: The Bank of Canada aims to keep inflation around 2%. If inflation rises above this target, interest rates may be increased to cool down the economy.
  • Economic growth: Interest rates are often lowered to stimulate economic growth during periods of slowdown or recession.
  • Employment levels: Strong employment levels and low unemployment rates can signal the need for higher interest rates to prevent the economy from overheating.
  • Global economic conditions: The Bank of Canada also considers global economic factors, such as trade tensions and geopolitical events, when making interest rate decisions.

According to James Laird, Co-CEO of Ratehub.ca, we’re currently in the fourth phase of the pandemic rate policy, which involves moving to a less restrictive rate policy. He explains:

“Phase 1 was dropping rates super aggressively; Phase 2 was increasing them dramatically to fight inflation; Phase 3 was keeping them elevated to tamp down inflation; Phase 4 is to move to a less restrictive rate policy.”

While it’s difficult to predict the exact future direction of interest rates, many experts believe that further rate cuts are likely in the coming months or years, as the Bank of Canada aims to support economic growth and maintain price stability.

Conclusion

The recent interest rate cut by the Bank of Canada has significant implications for both existing homeowners and prospective homebuyers. Homeowners with variable-rate mortgages can expect to see immediate savings on their monthly payments, while new homebuyers may find increased affordability and purchasing power.

However, it’s important to carefully consider the pros and cons of fixed-rate and variable-rate mortgages, as well as monitor the future interest rate outlook. Seeking professional advice from mortgage brokers or financial advisors can help you make informed decisions that align with your financial goals and risk tolerance.

Remember, the housing market is dynamic, and staying informed about interest rate changes and market conditions is crucial for making sound investment decisions.


At Everything Mortgages, we strive to help first-time homebuyers, small business owners, and hardworking professionals navigate their mortgage journeys. Whether it’s securing a loan or seeking better solutions, our team is here to guide you toward becoming mortgage-free sooner and building wealth faster. Reach out to us today to explore these strategies and more.

Note: This article is intended for informational purposes only and does not constitute financial advice. Please consult a financial advisor or mortgage professional before making decisions about your mortgage.


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