On September 25th, the Bank of Canada (BoC) made a pivotal decision by cutting its key interest rate in response to cooling inflation, which dropped to 2.0% year-over-year in July.
For homeowners and potential buyers, this rate cut could significantly impact mortgage rates, refinancing decisions, and the overall affordability of housing in Canada.
This article will explore the implications of the BoC’s rate cut, focusing on how it may lower mortgage rates and what homeowners should consider when refinancing or locking in rates.
The BoC’s decision to cut interest rates is largely a response to the country’s slowing inflation, signaling a shift in the economic landscape. With inflation cooling, the BoC aims to stimulate economic growth by making borrowing cheaper. This is good news for homeowners and prospective buyers, as lower interest rates generally translate to lower mortgage rates.
Mortgage rates, particularly those for variable-rate mortgages, are closely tied to the BoC’s key interest rate. When the central bank reduces its rate, lenders often pass on these savings to consumers in the form of lower mortgage rates.
For existing homeowners with variable-rate mortgages, this could mean a reduction in their monthly payments. For those looking to buy a home, the lower rates could improve affordability, potentially allowing them to qualify for a larger loan or reduce the long-term cost of their mortgage.
One key decision homeowners face after a rate cut is whether to opt for a fixed-rate or variable-rate mortgage. Understanding the differences between these two options is crucial to making an informed decision.
Variable-Rate Mortgages: As mentioned, variable-rate mortgages are directly influenced by the BoC’s key interest rate. A rate cut will generally lower the interest rate on these mortgages, leading to immediate savings on monthly payments. However, variable rates can fluctuate over time as the BoC adjusts its rate in response to economic conditions. While a lower rate today may be appealing, homeowners must be prepared for the possibility of rate increases in the future.
Fixed-Rate Mortgages: In contrast, fixed-rate mortgages are not immediately affected by BoC’s interest rate changes. These rates are typically set based on the yields of long-term government bonds, which are influenced by broader economic trends rather than the central bank’s short-term rate. However, a BoC rate cut can indirectly influence fixed mortgage rates by signalling to the market that economic conditions are favourable for lower rates. As a result, lenders may offer more competitive fixed-rate mortgage products in the coming months.
For homeowners who value stability and predictability in their mortgage payments, locking in a fixed rate might be a wise decision, especially if they believe rates will rise again in the future. On the other hand, those who are comfortable with some level of risk and want to take advantage of potentially lower rates in the short term might prefer to stick with or switch to a variable-rate mortgage.
The BoC’s rate cut also presents a potential opportunity for homeowners to refinance their existing mortgages. Refinancing involves taking out a new mortgage to replace the existing one, ideally at a lower interest rate. This can reduce monthly payments and overall interest costs, freeing up cash flow or shortening the loan term.
However, refinancing is not always a straightforward decision. Homeowners should consider several factors before proceeding:
The Bank of Canada’s recent rate cut presents a significant opportunity for homeowners and prospective buyers to benefit from lower mortgage rates. Whether you are considering refinancing, locking in a rate, or choosing between a fixed or variable mortgage, it’s important to assess your financial situation and long-term goals carefully. Consulting with a mortgage advisor can help you navigate these decisions and ensure you make the best choice for your circumstances.
As the economic landscape continues to evolve, staying informed about rate changes and their implications will be key to making smart mortgage decisions
The Bank of Canada’s next interest rate announcement is scheduled for Oct. 23, 2024
Entrust Mortgage is more than just a broker; we are your partner in growth.
Our team is committed to providing solutions that meet your current needs and pave the way for future success.
