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The Bank of Canada cut rates for the first time since the pandemic!

Bank of Canada reduced the rates this morning by 0.25%
First interest rate cut since the pandemic!

Dear reader,

The Bank of Canada (BoC) announced this morning (June 6th) that they lowered their target for the overnight rate to 4.75%. This is a 0.25% cut from a high of 5% that was reached in July 2023. Economists and market analysts were split on the decision to cut in June, but most had predicted a cut in July. Another great question is: When is the next cut? This is a more difficult question since market analyst expectations vary wildly, from 1% for this year (Next cut in July) to 1% by the end of 2025 (Next cut in December). I do expect another 0.50% cut this year starting  in either a cut in July or maybe September with the last one in either October or November. If there was an August meeting, I would have chosen that meeting for the next cut.  The next BoC meeting is on July 24th 2024. 


Inflation and Economy


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% (April data, the most recent). 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 Canadian is rapidly increasing, rental prices will remain stable or continue to increase and there is nothing that the BoC can do about it.


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 6.1% in April (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 measure will provide some relief to Canadians that have variable rates mortgages and lines of credit. 


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 5.95%. For the fixed rate mortgages, they are not directly affected by the decision of the BoC. However, on the news the bond yield started to drop. This means that in the near future we may see fixed rate 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 normally (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. 


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. For more details if you should consider a variable rate mortgage or a fixed rate mortgage, you can read last month newsletter: 



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 raise. 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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