The Bank of Canada makes periodic interest rate cuts, which can affect individuals differently depending on their stage in the home ownership journey. Variable rate mortgage holders benefit from lower monthly payments following a rate cut, while those with mortgages from the ultra-low-interest-rate pandemic era may face significant payment increases upon renewal. According to the Bank of Canada, about half of all outstanding mortgages are held by borrowers who have yet to face higher rates, leading to potential sticker shock. Mortgage agent Jimmy Elamad notes that rates could increase substantially upon renewal, with some monthly payments rising by more than $300.
The Equifax report found that 15% of mortgage renewals in 2024 had monthly payments increase by more than $300, with higher proportions in Ontario and British Columbia. For variable-rate mortgages, a 25-basis-point cut in interest rates can result in savings of around $15 per $100,000 borrowed. In the case of a $600,000 mortgage, this would translate to monthly savings of approximately $90. With three cuts amounting to a 0.75 percentage point drop, the monthly savings could reach around $270. Fixed-rate mortgages are tied to the bond market and do not adjust as quickly as variable rates in response to central bank rate cuts.
CEO and co-founder of Tribe Financial Group, Frances Hinojosa, explains that rate cuts by the Bank of Canada prompt banks to adjust their prime lending rates on the same day. While variable rates respond immediately to rate cuts, fixed rates may not change significantly right away. Hinojosa clarifies that fixed interest rates do not decrease by the same amount as variable rates following a Bank of Canada rate cut. The impact on fixed mortgage rates depends on shifts in the bond market, which can influence the cost of funds and pricing for fixed-rate mortgages.
The potential for increased affordability and competitiveness in the housing market is one positive consequence of Bank of Canada rate cuts. Ratehub.ca reported that housing affordability improved slightly in Canada in July as a result of recent rate cuts. While further cuts could potentially drive up prices and intensify market competition, home sales have remained sluggish. This presents an advantageous opportunity for first-time homebuyers to strategically navigate the current market conditions. CEO Frances Hinojosa notes that despite elevated housing prices, it is currently a buyer’s market, allowing for thoughtful consideration in property purchasing decisions.
Overall, the impact of Bank of Canada rate cuts varies for individuals depending on their mortgage type and stage in the home ownership journey. While variable-rate mortgage holders may experience immediate savings with each rate cut, those with mortgages from low-rate periods may face significant payment increases upon renewal. Despite potential challenges for some, rate cuts present opportunities for increased affordability and strategic home buying for those entering the property market. The relationship between central bank rate cuts, lender prime rates, and mortgage rates underscores the importance of understanding how these changes can affect monthly payments and overall affordability for homeowners.
