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Depending on where you are on your home ownership journey, a Bank of Canada (BoC) rate cut will be either welcome news or a very slight improvement on terrible news.
Every BoC cut means slightly lower monthly payments for people with variable-rate mortgages, and potential affordability gains for people hoping to get into the market. But people whose mortgages date back to the ultra-low-interest-rate pandemic era face a steep rise in payments upon renewal — an increase that a rate cut will improve only slightly.
And that group is a large one: In its 2024 Financial Stability Report released in May, the BoC estimates that “about half of all outstanding mortgages are held by borrowers who have yet to face higher rates.” Those people are “going to experience sticker shock,” TD Bank chief economist Beata Caranci wrote in a note last week, when they reach term on “historically low lending rates that are unlikely to materialize again in the absence of a severe recession.”
Those rates “could be sub two per cent, 1.5 or 1.75 [per cent] depending on what time you got it and now you’re renewing, it may be 4.5 if you go through a fixed rate, or if you go to a variable as of today, maybe high fives,” said Jimmy Elamad, a mortgage agent and partner at Y Mortgage, Mortgage Alliance. “So you’re gonna be in payment shock. Your payments are obviously going to increase substantially on renewal.”
A recent report by Equifax found that 15 per cent of mortgage renewals in 2024 had monthly payments go up more than $300. The proportion was even higher in Ontario and British Columbia, at around 20 per cent, Equifax says.
What a cut would mean for existing mortgages
The banks tend to adjust their prime lending rates the same day the BoC 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-basis-point cut shaves about $15 off a monthly payment. On a $600,000 mortgage, the monthly savings would be around $90. With three cuts totalling a 0.75 percentage point drop, monthly savings would approach around $270.
Fixed-rate mortgages are tied to the bond market, says Hinojosa, so they don’t move as fast.
“If we hear the Bank of Canada reducing the rate by a quarter percent, it’s not that your fixed interest rates will go down by the same amount, like the variables do,” she said. “They’re not directly related. You’d have to wait to see what the impact would be on the bond market, and that would impact, then, the cost of funds and the pricing on fixed mortgage rates.”
Elamad says bond markets have likely already priced in a September interest rate cut, so a cut itself probably won’t lead to much change on fixed rates. “However, the information in this meeting may drive the bonds further down because they may say, ‘Hey, we’re going to decrease the rates again.'”
What a cut would mean for people hoping to buy
Housing affordability improved slightly in Canada in July as a consequence of the BoC’s rate cuts, a Ratehub.ca report found. Although further cuts could lead to the market becoming more competitive and prices going up, home sales have remained sluggish so far.
Hinojosa says the current context offers “a tremendous opportunity” for someone looking to buy.
“Yes, I understand that housing prices are still quite elevated,” she said.
“However, it’s far more a buyer’s market today. So it gives that slowness and that ability to a first-time homebuyer to really be strategic about the property that they’re looking at purchasing.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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