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A first-time home buyer’s options won’t change much with tomorrow’s widely expected Bank of Canada (BoC) rate cut, but the “favourable conditions” currently available to them are likely to change two months from now, a mortgage expert says.
Prospective first-time buyers are currently better off with fixed-rate mortgages, which are less sensitive to the BoC’s moves, says Leah Zlatkin, a mortgage broker at lowestrates.ca.
The real-estate landscape currently “favours” first-time buyers, Zlatkin notes, with inventory growing but sales still sluggish. But federal changes to mortgage rules that take effect from December 15 are likely to shift the dynamic, she says, because they’ll give more buying power to more people.
Fixed-rate mortgages are “more closely linked to five-year bonds, and reflect people’s beliefs about interest rates, not only in the short term but over the next five years,” says Thomas Davidoff, an associate professor at UBC’s Sauder School of Business.
A 25-basis-point cut likely wouldn’t move fixed rates, Davidoff says, but a 50-basis-point cut could prompt more significant movement because it “may signal more interest from the Bank in aggressively cutting rates to avoid recession.”
Prior to the announcement, average fixed-rate loans were more than a percentage point lower than variable-rate options, Zlatkin notes, so people can qualify for meaningfully larger loans with that lower rate.
Even when variable rates follow the BoC’s lead, “it’s still cheaper to go with a fixed rate right now at 4.39 per cent,” Zlatkin said. “So, for somebody who’s struggling with qualifying, or qualifying for enough mortgage dollars, they’re still going to go fixed, because they need every penny or every per cent on that rate to qualify.”
But the qualification narrative will change substantially when the federal policies come online, Zlatkin says. Those policies raise the cap on insured mortgages from $1 million to $1.5 million (reducing the minimum down payment required for homes in the $1 million to $1.5 million range). They also allow first-time homebuyers and purchasers of new builds to take a loan with a 30-year amortization period.
Those changes are “really good news for first-time homebuyers,” Zlatkin says, because their buying power will increase, and so will their options. But that’s likely to also increase competition, she highlights, while pointing out that external factors and unforeseen events could cause the market to change in unexpected ways.
“I think in the next two months, it’s going to become harder and harder to buy a new home, and lots of people are going to be able to qualify for more than they would have before,” Zlatkin said. “And you better bet, when other people who’ve been waiting on the sidelines to get into the market for over a million dollars, when they finally are allowed to get into the market for over a million dollars, those people are going to be your competition to get that house.”
However, other indicators suggest the market could remain sluggish for some time. A recent survey by Leger for everyrate.ca found 74 per cent of Canadians considering buying or refinancing a home needed the BoC rate to fall below three per cent before they would make a move.
Relief for variable-rate holders
Though a BoC cut tends to carry through to variable-rate holders right away, with Canadian banks almost always following the central bank’s lead, there are relatively few people with variable mortgages today, Zlatkin says. Apart from those who have taken out variable rates in recent months, most others “ended up jumping ship on their variable-rate mortgages and moved into fixed products.”
Still, among those with variable-rate loans, lowestrates.ca says a 50-basis-point BoC cut would translate to around $28 in monthly savings for every $100,000 of a mortgage. For a loan of $500,000, the savings would be $140 a month. Compared with payments before the start of this easing cycle, when the overnight rate was five per cent, monthly payments on a $500,000 variable mortgage would be $350 less.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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