In a widely anticipated rate announcement today, the Bank of Canada (BoC) has decided to drop the overnight lending rate by 0.25 per cent to 4.75 per cent. This comes as a welcome relief for many consumers, economists and industry professionals, as Canadians have been weighed down by a high interest for over two years.
The CPI (consumer price index) for inflation has been steadily decreasing since August 2023 from four per cent, coming down over half from the high of 8.1 per cent in June 2022.
This steady decrease to April’s value of 2.7 per cent is a welcome sign that the economy has softened back to manageable levels and inflation has eased to the target band of one to three per cent for the central bank.
This morning’s rate decrease mirrors this sentiment that the Bank of Canada is satisfied with the ease in inflation. That being said, it’s likely that another rate cut might not happen until later in the year as they do not want to be too premature and lead us back into high inflation territory.
How will this impact mortgages and the housing market?
So, what does this mean for consumers?
With the rate cut, individuals on variable/adjustable rate mortgages will see a bit of relief in their cost of borrowing. Mortgagors on adjustable rate mortgages should see a payment decrease, whereas borrowers on static variable mortgages will likely not see any change on their payments if they have yet to hit their trigger point on their mortgage.
The trigger point of a mortgage is the point at which the monthly payments do not cover the interest of the mortgage anymore and the outstanding balance exceeds a certain percentage of the original purchase price, so the lender would force the borrower to either fix their mortgage into a fixed rate mortgage or pre-pay a lump sum to keep their amortization in line.
Many borrowers saw their mortgage hit this trigger point in 2023, so this rate cut would be a welcome change for many individuals that saw their interest rate go up by 4.5 per cent or more in the past two years.
Fixed rate mortgages will continue to track the bond market, which moves independent of the prime rate, but decreased borrowing costs will likely offer relief for the fixed rate soon after, as well.
With lower rates on the horizon, bond investments become more attractive in the short term which in turn push up the price of bonds and subsequently decrease the yields. Fixed rate mortgages move very closely to government bonds of the same term, so the lower yields on bonds inevitably lead to lower mortgage rates for consumers.
We expect this steady decline to continue into Q3 and Q4 of 2024, with rates hopefully settling into the low four per cent to high three per cent range, which is consistent with interest rates pre-pandemic.
Consumer confidence in the market has been high, with many waiting on the sidelines to jump once the central bank signals the first cut.
With today’s announcement, we expect more buyers to enter the market, which will drive up competition and home prices. We saw an uptick of four per cent in buyer activity and the Composite HPI (Home Price Index) from January to April already, so lower rates will inevitably increase this value even further.
If Q1 2024 was any indication of the real estate market for the rest of the year, we believe a nine per cent increase in price by the end of 2024 is not out of the question, compared to the same period last year, based on data from Royal LePage.
Advice for homeseekers following the rate cut
For individuals looking to purchase within the next four to six months, I’d highly recommend starting a pre-approval sooner rather than later to ensure you solidify your budget; the market moves quickly so the best thing to do is to be prepared.
Have the down payment ready, ensure your mortgage broker or advisor has all the necessary documents, and keep an open channel of communication with your realtor about realistic closing timelines. We’ve already started to see offers go in without subject to financing or other waivers, so we may see more of those as rates drop in the following weeks.
For borrowers who are looking to renew in the next four months, I’d also recommend reaching out to your mortgage advisor to ensure they are securing the best rate for you ahead of renewal. The banks typically do not offer the best renewal rate upfront, so it’s always a good idea to see what other options are available in the market. If rates drop prior to renewal, your advisor can always float the rate down to the new, lower rate, so there’s no disadvantage of starting earlier.
One last note to consider: consumers have been in a high-rate environment for about two years now and we’ve seen prices come down considerably from highs of 2022 due to increased borrowing costs.
If you compare the aggregate HPI for Canada over all property types, prices have dropped about 14 per cent, reflecting about a $120,000 drop in the benchmark price. Borrowing costs have gone up about 4.5 per cent in the same time span, so buyers in this market are still better off than individuals who bought at the peak of 2022 at low rates — a rough savings of around five per cent or about $43,000 over the past two years, based on the benchmark price.
This understandably comes with caveats based on property location, price and whether individuals took a fixed rate mortgage vs. a variable rate, but the math holds true when comparing the prime rate over all property types in Canada. With the end in sight, there hasn’t been a better time to buy in the past two years than right now, before market demand catches up with home prices.
As always, our suggestion remains the same to all our clients: invest with intention. We never suggest buyers purchase a property for the sake of a “quick flip” or to try and time the market. If the property fulfills your needs, whether it be for a primary residence or for investment, and the payments are manageable for your long-term goals, purchasing real estate has always been the leading path — albeit not the quickest — towards lasting wealth among Canadian families.
Vincent Tong is the Principal Broker at DLC Clear Trust - Signature Mortgages and consistently ranks in the Top 75 of Brokers in Canada. His goal has remained the same throughout the past 10 years: to provide his clients with effective, transparent and efficient service so they can achieve their home ownership goals, faster.
