On March 12, 2025, the Bank of Canada (BoC) announced a 0.25% reduction in its benchmark interest rate, lowering it to 2.75%. This makes the prime rate for mortgages at 4.95%. This decision, marking the seventh rate cut in nine months, aims to counteract potential economic challenges arising from recent U.S. tariffs on Canadian imports. The Bank of Canada's next interest rate announcement is scheduled for April 16, 2025.
The BoC's decision is influenced by ongoing trade tensions, particularly the recent U.S. tariffs on Canadian goods. These measures have introduced economic uncertainties, prompting the central bank to adopt a more accommodative monetary stance. The BoC has indicated that as long as uncertainties about tariffs and the economy persist, it will continue to adjust rates accordingly. The last quarter of 2024 was economically good with a 2.6% growth. This created a strong demand for housing at the beginning of the year. However, February saw a slowdown, especially in the second half when the tariffs became front page news. The BoC is now expecting a lower than anticipated growth for the first half of the year and will revise depending on the tariffs breath and duration. Inflation remains a critical factor in monetary policy decisions. As of January 2025, Canada's annual inflation rate edged up to 1.9%, influenced by higher energy prices. The BoC will monitor inflation trends closely to ensure they align with its 2% target. However, they will also monitor the trade/tariffs war to ensure that there will not be a sustained economic downturn.
Implications for Variable-Rate Mortgage Holders
For homeowners with variable-rate mortgages, this rate reduction offers tangible benefits:
Payment Reduction: If your mortgage payments fluctuates with interest rate changes, you can anticipate a decrease of approximately $15 per $100,000 of your mortgage balance. For instance, a $400,000 mortgage would see a monthly payment reduction of about $60.
Variable rate mortgage with fixed payments: Some variable-rate mortgages maintain consistent payments, adjusting the principal-to-interest ratio instead. If your payments increased during previous rate hikes to cover the interest, it's advisable to continue with these higher payments. Doing so accelerates principal repayment, potentially shortening your mortgage term and reducing overall interest costs. Most bank portals will tell you what is expected for amortization. If your amortization is still longer than what it should be, you should continue with the higher payment. If the amortization is now shorter, reviewing the payment (if possible, you cannot go lower than the original one) may be something to look for, but only if the payment is difficult to make every month. For example, you started with a 25-year mortgage. We are 3 years in and your amortization is showing as 26 years, you should not touch your payment. However, if your 25-year mortgage is now showing 20 years, and that you have difficulties making your payment you can ask to reduce them closer or to your original payment as long as your amortization does not go higher than 22 years (for this example). If you are unsure of what to do, calling us is the best course of action.
Fixed rate mortgage are not influenced by the current changes. Since you have a fixed rate, nothing changes for you until renewal or if you refinance.
Economic Context and Future Outlook
Just for notes, fixed rates are not directly influenced by the Bank of Canada. They fluctuate following the bond yield of the Canadian government. Those are market-driven and varies based on market sentiment. We have seen in the past few weeks yield going down; however, that has not yet translated into lower rates for purchasers. However, people that are renewing have seen a reduction in the rates that were offered. This is good news because most people will not see a doubling of their rates are renewals, as it was believed to happen last year. Banks in general are willing to reduce rates to retain clients at renewal because there is no real cost in keeping them. So, they will now fight to keep your business.
What to do if you are a buyer
For buyers, this uncertainty is actually a great time for a purchase. Rates are trending down and inventory is pilling up. As it is normal in spring market, more sellers enter the market hoping to sell their properties at a better price. The softening of the real estate market since the beginning of the trade war talk in February has put many buyers back on the sideline. So, with great inventory and lower demand, looking for a purchase may allow you to get a better price or better condition and a much more pleasant experience due to less competition. Of course, this is true if you are certain that your income will not change negatively in the coming months. The industry that you are working in will be the most important input in your decision-making process.
Conclusion
The recent rate cut by the Bank of Canada presents opportunities for variable-rate mortgage holders to reduce interest expenses and accelerate principal repayment. However, the broader economic landscape, shaped by trade tensions and inflation dynamics, necessitates careful financial/mortgage planning. Consulting with a mortgage broker can provide personalized strategies to navigate this evolving environment effectively. The goal should be to avoid the traps that the banks are laying down for you.
If you want to make an appointment to discuss your mortgage you can use the link below.
Simon Bilodeau and Gina Lopez
RefinanceBC
604-828-9864
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