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Bank of Canada Has Continued Pausing Rates – What This Means For Mortgage Holders and Homebuyers

Bank of Canada Has Continued Pausing Rates – What This Means For Mortgage Holders and Homebuyers

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    Bank of Canada Leaves Rate Unchanged – What This Means For Your Mortgage and Future Plans

    The Bank of Canada (BoC) has left its overnight target for the policy rate unchanged at 5%. While inflation in February took a step in the right direction, coming in at 2.8%, news of the BoC’s decision did not shock most financial and mortgage experts. Bond yields have continued to decrease since the last rate announcement in March. The closely watched bond market continues to lead expectations for a soft-landing recovery for Canada’s real estate market and the economy in general.

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    The Bank of Canada Policy Rate Left Unchanged At 5.00%

    This round of rate decisions from the Bank of Canada does not impact variable-rate (VRM) and adjustable-rate (ARM) mortgages. However, we suspect many variable-rate mortgage (VRM) holders who financed their property 3 years ago when rates were at their lowest could be hitting their trigger point.

    Economists expect Canada’s neutral rate to increase due to many factors, including population growth and negative productivity growth measured by a reduction in Canada’s per capita income. The neutral rate is the rate where the economy just hums along – neither heating up nor slowing down. Timing rate cuts to find the new neutral rate is not an easy feat. The conversation moving from whether rate cuts will happen to when they will happen shows the market that the BoC is taking its responsibility seriously in moderating expectations for Canadians. In turn, bond yields may reduce further to compensate Canadians for a soft landing, which gets harder the longer the BoC holds the policy rate at 5%.

    For example,

    if you have a $500,000 mortgage secured at nesto’s 5-year variable low rate of , your monthly payment would be $3,191.02. On every $100,000 balance, your mortgage payment will be $638.21 while your stress-tested mortgage payment will be $765.21.

    Common mortgage amounts and corresponding mortgage payments on nesto’s 5-year variable low rate of on a 25-year amortization. Qualifying mortgage payment affects all new mortgages, which need to be qualified on stress-tested payment based on the contract rate plus 2% ().

    April 2023 vs. April 2024 – What Changed

    How has housing affordability changed since last year? In comparison to renting versus owning costs, renting doesn’t build equity. But it does provide shelter while you wait to purchase your first home. However, rent inflation has accelerated faster than homeownership costs in many markets across the country, while rents still may not cover ownership costs. Inflation will decrease home prices while eroding affordability. While home prices may go up and down, rents will only go up while there remains a lack of housing in Canada. By waiting on the sidelines, you risk missing out and could face an even more restrictive housing market. Let’s simplify costs and compare renting versus homeownership.

    Today, Canada’s benchmark home price is $720,500, while a year ago, it was $662,901, which has increased by 0.8%. However, the lowest 5-year variable mortgage rate at nesto has increased from 5.45% a year ago to today. These changes mean that Canada’s average monthly mortgage payment has increased from $3,495.041 to $3,678.602. This implies that nationally, the average insurable mortgage payment increased by 5.25% from a year ago. In comparison, during that same period, Canada’s average national rent increased by 10.5% from $1,888 to $2,193, which in dollars is $258 year-over-year.

    TL; DR— Canada‘s monthly mortgage payment increased by 5.25%. Meanwhile, average home prices increased by 0.8%, and average national rents have increased by 10.5%. In dollars, mortgage payments have increased by $183.56, average home prices have increased by $57,599, and average national rents have increased by $258.

    Today, Quebec’s benchmark home price is $471,200, while a year ago, it was $453,700, which has increased by 3.9%. However, the lowest 5-year variable mortgage rate at nesto has increased from 5.45% a year ago to today. These changes mean that Quebec’s average monthly mortgage payment has increased from $2,218.071 to $2,405.772. This implies that, provincially, the average insurable mortgage payment increased by 8.46% from a year ago. In comparison, during that same period, Quebec’s average provincial rent increased by 9.0% from $1,803 to $1,981, which in dollars is $178 year-over-year.

    TL; DR—In Quebec, the monthly mortgage payment increased by 8.46%, average home prices increased by 3.9%, and average provincial rents have increased by 9.0%. In dollars, mortgage payments have increased by $187.70, average home prices have increased by $17,500, and average national rents have increased by $178.

    Today, Ontario’s benchmark home price is $868,200, while a year ago, it was $867,400, which has increased by 0.1%. However, the lowest 5-year variable mortgage rate at nesto has increased from 5.45% a year ago to today. These changes mean that Ontario’s average monthly mortgage payment has increased from $4,240.591 to $4,432.702. This implies that, provincially, the average insurable mortgage payment increased by 4.53% from a year ago. In comparison, during that same period, Ontario’s average provincial rent increased by 1.0% from $2,407 to $2,491, which in dollars is $24 year-over-year.

    TL; DR—In Ontario, the monthly mortgage payment increased by 4.53%, average home prices increased by 0.1%, and average provincial rents have increased by 1.0%. In dollars, mortgage payments have increased by $192.11, average home prices have increased by $800, and average national rents have increased by $24.

    Today, Alberta’s benchmark home price is $496,000, while a year ago, it was $454,800, which has increased by 9.06%. However, the lowest 5-year variable mortgage rate at nesto has increased from 5.45% a year ago to today. These changes mean that Alberta’s average monthly mortgage payment has increased from $2,223.451 to $2,532.392. This implies that, provincially, the average insurable mortgage payment increased by 13.89% from a year ago. In comparison, during that same period, Alberta’s average provincial rent increased by 20% from $1,366 to $1,708, which in dollars is $342 year-over-year.

    TL; DR—In Alberta, the monthly mortgage payment increased by 13.89%, average home prices increased by 9.06%, and average provincial rents have increased by 20%. In dollars, mortgage payments have increased by $308.94, average home prices have increased by $41,200, and average national rents have increased by $342.

    Today, British Columbia’s benchmark home price is $966,100; a year ago, it was $928,800, which has increased by 4.02%. However, the lowest 5-year variable mortgage rate at nesto has increased from 5.45% a year ago to today. These changes mean that British Columbia’s average monthly mortgage payment has increased from $4,540.761 to $4,932.542. This implies that, provincially, the average insurable mortgage payment increased by 8.63% from a year ago. In comparison, during that same period, British Columbia’s average provincial rent increased by 1% from $2,456 to $2,481, which in dollars is $25 year-over-year.

    TL; DR—In British Columbia, the monthly mortgage payment increased by 8.63%, average home prices increased by 4.02%, and average provincial rents have increased by 1%. In dollars, mortgage payments have increased by $391.78, average home prices have increased by $37,300, and average national rents have increased by $25.

    *1 and 2: Values for mortgage payments calculated based on nesto’s variable rate over a 25-year amortization period with a 20% downpayment using the average/benchmark home price in the stated month as reported by CREA for the location.

    Bank of Canada Leaves Rate Unchanged – What This Means For Your Mortgage and Future Plans

    The Bank of Canada maintains its key interest rate at 5%, a decision that holds significant implications for mortgage rates, inflation, and the broader Canadian economy. This move, aimed at balancing economic growth and inflation, marks the sixth consecutive period of stability since July 2023, underscoring the central bank’s cautious approach amidst fluctuating global economic indicators.

    As homeowners and prospective buyers assess the impact of the current Bank of Canada interest rate on their financial plans, it’s crucial to consider factors such as the prime rate, monetary policy adjustments, and the broader implications for the Canadian dollar and unemployment rates.

    Let’s discuss what these developments mean for your mortgage strategy and future financial planning.

    Economic Indicators, Mortgage and Housing Implications for Canadians

    The Bank of Canada’s decision to keep the interest rate unchanged impacts Canadians, affecting everything from mortgage payments to investment strategies. To improve cash flow, it’s advisable to prioritize high-interest debts and consider postponing non-essential expenses. Postponing non-essential purchases will improve your personal inflation rate and generally help ease inflation.

    The BoC makes policy interest rate adjustments up to 8 times a year, offering the BoC flexibility to respond to economic shifts. These adjustments to the Bank’s overnight rate will affect all mortgage rates, while your personal rate will be affected by your creditworthiness, loan-to-value ratio and the mortgage type/term you choose. The trend for renewals is higher rates, with the interest component potentially doubling or tripling upon maturity, which requires careful planning and budgeting. 

    The Bank’s inflation management strategy is a flexible inflation-targeting system, aiming for a 2% inflation rate. Current projections indicate Inflation is expected to hover around 3% in the first half of 2024, and return to the target by 2025. 

    Business and employment slowdown has led to a tightening in the job market, with job growth lagging behind population growth. This trend has contributed to a slight increase in the unemployment rate for March. The current interest rate environment presents challenges for businesses, especially exporters and those looking to invest.

    The Canadian economy has shown signs of slow growth since mid-2023, attributed to reduced consumer spending and cautious business investment. The Bank of Canada’s forecast indicates a continuation of this trend into the first half of 2024, with a hopeful rebound in the latter half of the year and into 2025. This cautious approach aims to control inflation, encouraging saving when rates are high and spending when rates are low, which controls the overall economic momentum.

    Combining policy rate adjustments with economic forecasts and indicators, this layered approach underscores the Bank of Canada’s commitment to fostering a stable yet adaptable economic environment. Every policy announcement is followed up with a Summary of Governing Council Deliberations a few weeks later and a quarterly Monetary Policy Report when the Governing Council will expand on the specific reasons for their decision. 

    Considerations for your mortgage strategy:

    Fixed-rate holders won’t experience any immediate impact; however, planning for renewal terms is crucial. Fixed-rate mortgages provide a shield against rate fluctuations for the duration of your mortgage term.

    Variable-rate holders may experience changes in their mortgage payment allocations, with a continued larger portion going towards interest, which can affect monthly budgets. Adjustable-rate mortgages (ARM) provide the potential for immediate savings.

    Adjustable-rate holders won’t experience any changes in their mortgage payments, but they may continue to face challenges in their monthly budgets.

    HELOC (Home Equity Line of Credit) holders should reassess their debt load to ensure sustainability under current rates. If they must renew with their lender before rates come down, they might want to consider moving some of their revolving balance into their fixed-rate mortgage component. Borrowers with collateral-charge mortgages could also consider a combination of hybrid fixed/variable mortgages to increase flexibility with a mix of fixed and variable rates.

    Considerations for your shelter strategy:

    Buying vs. renting considerations are skewed towards renting as higher interest rates make entering the housing market challenging for prospective homebuyers while existing homeowners face increased monthly expenses. Renting offers flexibility and predictable costs but lacks equity building.

    Housing market conditions such as home prices and the sales-to-new-listings ratio (SNLR) indicate a balanced market in many regions of Canada, yet prices continue to remain high. Housing market stability is providing balance, with the sales-to-new listings ratio (SNLR) indicating equilibrium, suggesting a steady demand. However, the anticipated rise in average home price underscores the escalating challenge for buyers in the market.

    How You Can Prepare Post-Bank of Canada Rate Decision

    In the wake of the Bank of Canada’s decision to leave the interest rate unchanged, Canadians are presented with a pivotal moment to reassess their mortgage strategy. For homeowners up for renewal in this housing market, many options are available. Multiple rateholds on your early renewals remain a viable choice to lock into a fixed mortgage, while extended mortgage terms could provide a hedge against resurging inflation.

    For prospective homebuyers, a slightly higher payment on your first term could still provide more savings if you pay less for the same home and need a smaller mortgage to qualify. As a reminder for anyone on the sidelines, sitting out this spring lending season could cost you more than a mortgage term of higher interest carrying costs to become a homeowner. Don’t be caught gathering your financial documents. As housing affordability improves with each rate cut, there will be more buyers than homes available for sale.

    However, timing the market for your purchase may be difficult as the Bank of Canada (BoC) is expected to move rates down once inflation is under control, thus raising home prices. The current rate pause could increase the number of entrants into the housing market, driving values up further. 

    For well-qualified homebuyers and homeowners up for renewal, an adjustable-rate mortgage (ARM) could provide immediate savings on your budget as the BoC policy rate reduces later in the year. Unlike a variable-rate mortgage (VRM), an ARM’s monthly payment will adjust with each adjustment in the lender’s prime rate. The BoC is expected to start lowering its policy rate in the second half of 2024. The market is ever-changing, and understanding economic indicators is critical to optimizing your mortgage strategy.

    Early Renew Your Mortgage

    Considering the unpredictable nature of the Bank of Canada interest rate, early renewal of your mortgage could be a strategic move to safeguard against future rate hikes. For borrowers who don’t have room in their budgets for further market fluctuations, we recommend early renewing your variable-rate mortgage (VRM) into a fixed rate. Converting your variable mortgage to a fixed mortgage can stabilize your payment over the next 3 to 5 years and potentially reduce your monthly bill, as longer-term fixed rates have come down with falling bond yields. Speak with your lender now to understand your options for early renewal or refinance to a fixed rate. 

    In its Fall Economic Statement, the federal government reiterated that borrowers with insured mortgages only have to re-qualify at their contract rate when switching lenders. This means that on nesto’s lowest variable rate today, households could qualify with $25,919.28 in annual income for every $100,000 mortgage balance versus the $29,470.85, which is required to stress-test a similar mortgage. Or for even less on nesto’s lowest fixed rate today.

    By staying informed and proactive about your mortgage renewal options, you can confidently navigate fluctuating interest rates and ensure that your mortgage best suits your financial situation and future plans.

    Extending Your Mortgage Term

    Extending your mortgage term can be a strategic decision, particularly in the context of the Bank of Canada’s interest rate environment

    One of the best mortgage extension options is blend-and-extend, which is really an early renewal blended with current rates. If you believe the fixed rates could increase in the near term, extending your mortgage would give you access to lower rates without penalties for breaking your mortgage. The drawback is that if you extend and rates should go down, then you’re looking at potentially higher interest over the extended period.

    Refinancing your mortgage may be the simplest solution for borrowers looking for equity or cash flow. A refinance now would also prevent a renewal during periods of uncertainty. 

    A longer-term fixed-rate mortgage could provide you with predictable payments. Although a fixed mortgage rate offers the most stability, an adjustable-rate mortgage (ARM) will avoid hitting your trigger rate if inflation resurges amid current economic conditions.

    Renting While You Wait To Buy

    In the quest for homeownership, the journey to amassing a substantial downpayment is often the first hurdle Canadians encounter. This financial milestone, however, can be reached through a variety of avenues, each tailored to different financial situations and goals. 

    Compare renting versus owning costs, where rent may cover mortgage payments, albeit renting doesn’t build equity. Inflation will increase home prices while eroding affordability, so buy now if your finances allow. By waiting on the sidelines, you risk missing out and could face an even more restrictive housing market.

    Home Prices Are Only Headed Up

    As Canadians navigate the landscape of homeownership, understanding regional market trends becomes paramount. The projected growth in home prices across various provinces underscores the importance of strategic planning for prospective homebuyers. 

    Home sales are forecasted to increase throughout most parts of Canada this spring and summer, and the current rate pause could increase housing unaffordability. The BoC’s subsequent deliberation is due on June 5th, in the middle of the 2024 spring lending season, when a flurry of homebuying is expected.

    Given the higher demand and lower housing supply, it is inevitable that housing prices will continue to rise in Canada over the long term. Even as the Feds walk back on immigration targets, Canada’s appeal for resettlement remains unchanged with our abundant natural resources and political stability. A drastic reduction in immigration targets is unlikely as our aging population and low fertility rates add to Canada’s need for additional tax-paying permanent residents to fund the various government social programs. 

    Housing demand will only increase as supply continues to decrease. Global warming will also make Canada a popular destination for climate and immigration refugees, contributing to further housing demand. This persistent demand could drive up housing costs, making it an even more valuable commodity.

    Final Thoughts

    The Bank of Canada kept Canada’s benchmark policy rate at a 23-year high while waiting for confirmation that its inflation fight is ending. March and April’s CPI readings are due April 16th and May 21st, well before the next policy rate announcement on June 5th. If the inflation needle continues to move down in the same direction as February’s reading, the probability of a rate cut could improve. 

    The Canadian bond market has revived lately, with the leading indicator, the Government of Canada’s 5-year bond yield, rising 34 basis points from the start of 2024. This increase suggests it might be a good time for homeowners to lock in their rates or consider converting from variable to fixed rates. Fixed rates tend to anticipate the Bank of Canada’s overnight rate. 

    If the market expects a drop in the overnight rate in the future, fixed rates will start to decrease today. However, the market may have overestimated the speed and extent of these decreases, leading to a correction. The Bank of Canada and the Federal Reserve have indicated they will only cut rates when inflation is sustained at around 2%, a target that needs to be met. Therefore, while rates are expected to decrease later this year, the decrease may not be as significant as previously thought.

    Borrowers’ impact with this rate hold will be felt most among renewers as their mortgages reach maturity over the next few years. Although this may delay or dampen many homebuyers’ plans to get into homeownership, it will not change the available stock or supply of housing in this country.

    If you’re getting ready for a mortgage renewal or a home purchase, the best way forward is to speak with our mortgage expert. With as little as 5 minutes to complete an application, you’ll be well on your way to your most suitable mortgage solution.  Contact us today!

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