Depending on where you are in your home ownership journey, the Bank of Canada (BoC) rate cut will either be welcome news or a very slight improvement in terrible news.
Each BoC cut means slightly lower monthly payments for people with variable rate mortgages, and a potentially affordable benefit for people hoping to get into the market. But people whose mortgages date back to the pandemic with ultra-low interest rates face steep increases in payments after they renew — increases that rate cuts will only marginally ameliorate.
And this group is big: in 2024 Financial stability report Released in May, The BoC estimates that “around half of all outstanding mortgages are held by borrowers who have not yet faced higher rates.” Those “will face a sticker shock,” TD Bank chief economist Beata Caranci wrote in a note last week when they hit “historically low lending rates that are unlikely to materialize again in the absence of a severe recession.”
These rates “could be below two percent, 1.5 or 1.75 [per cent] Depending on what time you got it and you’re renewing now, it might be 4.5 if you go through a fixed rate, or maybe a high 5 if you go variable starting today. Partner at Y Mortgage, Mortgage Alliance. So you will be in payment shock. Obviously, your payments will increase significantly with renewal.
A recent report by Equifax found that 15 percent of mortgage renewals in 2024 had monthly payments of more than $300. Equifax says the ratio is higher in Ontario and British Columbia, at about 20 percent.
What the reduction means for existing mortgages
Banks tend to adjust their prime lending rates on the same day the Federal Reserve moves, says Francis Hinojosa, CEO and co-founder of Tribe Financial Group.
With a variable rate mortgage, for every $100,000, a 25-point reduction cuts about $15 off the monthly payment. On a $600,000 mortgage, the monthly savings would be about $90. With three reductions at 0.75% down, the monthly savings comes to about $270.
Hinojoza says fixed-rate mortgages are tied to the bond market, so they don’t move quickly.
“If we hear that the Bank of Canada has cut rates by a quarter of a percentage point, it’s not like your fixed interest rate is going to drop by the same amount as variable,” he said. “They are not directly related. You will have to wait to see what the impact will be on the bond market and then the cost of funds and pricing of fixed mortgage rates.
Ilamad says bond markets have likely already priced in a rate cut in September, so the cut itself is unlikely to lead to much change in fixed rates. However, the information from this meeting may send bonds down further because they may say, “Hey, we’re going to cut rates again.”
What does a price cut mean for people who want to buy?
Ratehub.ca reports that home prices in Canada improved slightly in July due to the Bank of Canada’s rate cut. Although further reductions could lead to a more competitive market and higher prices, housing sales have so far been slow.
Hinojosa says the current conditions present a “tremendous opportunity” for someone looking to buy.
“Yes, I know housing prices are still quite high,” he said.
However, today it is more of a buyer’s market. So it slows down and gives a first-time home buyer the ability to be really strategic about the property they’re looking to buy.
John McFarlane is a senior correspondent for Yahoo Finance Canada. Follow him on Twitter @jmacf.
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