Dear reader,
The Bank of Canada (BoC) announced this morning (July 24th) that they lowered their target for the overnight rate to 4.5%. This is a 0.25% cut from the last meeting and a 0.5% cut from the high of 5% that was reached in July 2023. The market is still pricing another 0.5% cut for this year. We are now at the same level as of spring of 2023 when mortgage rates were lower. The next BoC meeting is on September 4th 2024.
Are those cuts enough?
The main reason that the BoC cut this morning is that inflation has been under 3% for the entirety of 2024. It stands at 2.7% according to June’s data. It is also on a downward trend since we were at 4% in August 2023. A big component of inflation is shelter cost which is driven by rent price and mortgage costs. Reducing interest rates will help with mortgage cost as long as the real estate market does not gain too much in price. For the rent prices, it is an equilibrium between the number of rental availability and the number of people looking for a place to rent. The supply of rental is fairly fixed in the market but the number of working-age Canadians is rapidly increasing, rental prices will remain stable or continue to increase and there is nothing that the BoC can do about it. Another thing to consider is that high-interest rates decrease the viability of building new properties. The proof is the number of new housing developments is declining. We are now at 241.7K units that are going to be built this year. This is a sharp decline from the 2021 peak of 321.3K. We are therefore probably many years behind to be able to create affordable housing.
The broader economy started to see some decline, with slow to no growth since the beginning of the year. Also, the unemployment rate steadily grew from 5.7% in January to 6.4% in June (latest data). The economy is no longer operating above capacity, and is now actually operating under capacity. This means that businesses can provide more goods and services than Canadians are capable or willing to buy. This also means that inflation should continue to decrease.
This measure will provide some relief to Canadians that have variable rates mortgages and lines of credit. However, since the economic data is worsening quickly, the BoC will need to keep cutting rates in the coming months. Every month, there are many Canadians renewing their mortgages at higher rates. Approximately, 76% of all mortgages will renew in the next 24 months at higher rates than their original rate, increasing their payment by up to 50% (average will be 30-40%) using the current rates. This will further slowdown the economy. So, to avoid too much of a slowdown, the BoC will cut rates earlier and maybe faster than originally anticipated.
Effect on Interest rates
Because we have 2 types of mortgages, fixed and variable, they will be affected differently. Variable rate mortgages including lines of credit are affected today (For existing mortgages, see next paragraph). All rates on variable rate mortgages are reduced by 0.25%. Now, the best advertised variable rate mortgage is 5.7%. For the fixed rate mortgages, they are not directly affected by the decision of the BoC. However, after these news the bond yields started to drop. This means that in the near future we may see fixed rates go down as well.
Advice for Mortgage Holders and Seekers
If you have a variable mortgage or a line of credit, either an HELOC or personal, you will see a decrease in your payment by about 15 $ per $100,000 of mortgage and 20$ per $100,000 for the line of credit. So, if you have a $500,000 mortgage, your payment will decrease by $75 per month or $100 for the line of credit. If you have a variable rate mortgage with a static payment, most likely with TD, if I arranged your mortgage, your payment will not change. This means that you will start paying your mortgage a little bit faster. If in the past, you had increased your payment to cover at least the interest, I do not suggest reverting to a lower payment. It is better to use the extra payment to increase your principal payment to start paying down your mortgage instead. If you have a problem making your payments, contact me to discuss the right strategy. All these changes will likely happen at your next month's payment. If you are paying weekly or bi-weekly, you will see the change in the second round of payments (bank dependant).
If you have a fixed rate mortgage, nothing changes for you until your renewal. If you have a renewal in the coming 12 months, you should start your process sooner rather than later because you may have a risk of a payment shock.
Gina and I put a presentation together on how to do a renewal. You can subscribe here:
If you are looking for a mortgage, your pre-approval does not change because you are more likely to have a preapproval on a 3-year fixed instead of a variable rate. If rates start falling you will receive the lower rate.
If you are not pre-approved, yet, I would suggest starting your process now and not waiting for more interest rate cut news because then the market will likely pick up steam and prices will likely rise. You would have the chance to look into a market with more inventory and less competition than if you wait.
If you need any help with a mortgage, preapproval or a plan for the future, you can contact me or Gina by scheduling an appointment:
Sincerely,
Simon Bilodeau and Gina Lopez
Mortgage Broker
DLC-Mortgage Negotiators
604-828-9864
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