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

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

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

    The Bank of Canada (BoC) has left its overnight target for the policy rate unchanged at 5%. While inflation surged slightly in December to 3.4% due to base-year effects, 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 at the beginning of December. 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%

    Variable-rate (VRM) and adjustable-rate (ARM) mortgages are not impacted by this round of rate decisions from the Bank of Canada. However, we suspect many variable-rate mortgage (VRM) holders who financed their property 2 years ago when rates were at their lowest could be hitting their trigger point.

    However, this could still signal to bond markets that the BoC is taking its financial 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 5.90%, your monthly payment would be $3,191.02.

    Mortgage Amount Mortgage Payment Qualifying Mortgage Payment
    $100,000 $638.21 $765.21
    $200,000 $1,276.41 $1,530.41
    $300,000 $1,914.61 $2,295.62
    $400,000 $2,552.81 $3,060.82
    $500,000 $3,191.02 $3,826.02
    $600,000 $3,829.22 $4,591.23
    $700,000 $4,467.42 $5,356.43
    $800,000 $5,105.62 $6,121.63
    $900,000 $5,743.83 $6,886.84
    $1,000,000 $6,382.03 $7,652.04
    Common mortgage amounts and corresponding mortgage payments on nesto’s 5-year variable low rate of 5.90% 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% (7.90%).

    January 2023 vs. January 2024 – What Changed

    Today, Canada’s average home price is $710,300, while a year ago, it was $705,600, an increase of 0.67%. However, the lowest 5-year variable rate at nesto has increased from 5.20% a year ago to 5.90% today. This change means that the average monthly payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $3,366 to $3,626. Canada’s average national rent increased approximately 11% from $1,883 to $2,116 over the same period. The interest component of the mortgage payment has increased by $260 from a year ago; comparatively, average rent prices increased by $233 year-over-year.

    TL;DR – Within Canada, the monthly mortgage payment increased by 7.74% from a year ago, while Canada’s aggregate benchmark home price increased by 0.67% during the same period.

    Quebec’s average home price is $462,100; a year ago, it was $445,500, an increase of 3.73%. However, the lowest 5-year variable rate at nesto has increased from 5.20% a year ago to 5.90% today. This change means that the average monthly payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $2,125 to $2,359. Meanwhile, the average rental prices in Québec increased approximately 4% from $1,875 to $1,953 over the same period. The interest component of the mortgage payment has increased by $234 from a year ago; comparatively, average rent prices increased by $78 year-over-year.

    TL;DR – Within Quebec, the monthly mortgage payment increased by 11% from a year ago, while Quebec’s average home price increased by 3.73% during the same period.

    Ontario’s average home price is $851,000; a year ago, it was $855,000, an increase of 0.47%. However, the lowest 5-year variable rate at nesto has increased from 5.20% a year ago to 5.90% today. This change means that the average monthly payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $4,079 to $4,345. Meanwhile, the average rental prices in Ontario increased approximately 10% from $2,201 to $2,446 over the same period. The interest component of the mortgage payment has increased by $266 from a year ago; comparatively, average rent prices increased by $245 year-over-year.

    TL;DR – Within Ontario, the monthly mortgage payment increased by 6.53% from a year ago, while Ontario’s aggregate benchmark home price increased by 0.47% during the same period.

    Alberta’s average home price is $485,400, while a year ago, it was $446,400, an increase of 8.74%. However, the lowest 5-year variable rate at nesto has increased from 5.20% a year ago to 5.90% today. This change means that the average monthly payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $2,130 to $2,478. Meanwhile, the average rental prices in Alberta increased approximately 16% from $1,420 to $1,691 over the same period. The interest component of the mortgage payment has increased by $348 from a year ago; comparatively, average rent prices increased by $271 year-over-year.

    TL;DR – Within Alberta, the monthly mortgage payment increased by 16.38% from a year ago, while Alberta’s aggregate benchmark home price increased by 8.74% during the same period.

    British Columbia’s average home price is $951,500; a year ago, it was $921,200, an increase of 3.94%. However, the lowest 5-year variable rate at nesto has increased from 5.20% a year ago to 5.90% today. This change means that the average monthly payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $4,395 to $4,889. Meanwhile, the average rental prices in BC decreased by approximately 1% from $2,525 to $2,500 over the same period. The interest component of the mortgage payment increased by $494 from a year ago; comparatively, average rental prices decreased by $25 year-over-year.

    TL;DR – Within BC, the monthly mortgage payment increased by 11.24% from a year ago, while BC’s aggregate benchmark home price increased by 3.94% during the same period.

    How You Can Prepare Post-Bank of Canada Rate Decision

    For homeowners up for renewal in this housing market, many options are available. Early renewals remain a viable choice to lock into a fixed mortgage while extending mortgage terms can act as a hedge against 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 for the lower price. Before purchasing, renting may be wise while waiting for inflation to settle.

    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 moving the needle up on home prices. The current rate pause could increase the number of entrants into the housing market, thus 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 decisions.

    Early Renew Your Mortgage

    For borrowers who do not have the bandwidth 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. Talk to 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 today’s fixed rates, households could qualify with $24,000 annual income for every $100,000 mortgage balance versus $27,900 required to stress-test a similar mortgage.

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    Extending Your Mortgage Term

    For borrowers looking for equity or cash flow, refinancing your mortgage may be the simplest solution. 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

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

    Average rents in Canada increased by 11% annually compared to last January, whereas during the same period, average benchmark home prices nationally increased by 0.67%.

    Average rents in Quebec increased by 4% annually compared to last January, whereas during the same period, average benchmark home prices provincially increased by 3.73%.

    Average rents in Ontario increased by 10% annually compared to last January, whereas during the same period, average benchmark home prices provincially decreased by 0.47%.

    Average rents in Alberta increased by 16% annually compared to last January, whereas during the same period, average benchmark home prices provincially increased by 8.74%.

    Average rents in British Columbia decreased by 1% annually compared to last January, whereas during the same period, average benchmark home prices provincially increased by 3.94%.

    Home Prices Are Only Headed Up

    As home sales pick up throughout most parts of Canada well ahead of spring, the current rate pause could take housing unaffordability to a new level. The next deliberation by the BoC is due out on March 6th, at the start 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 if 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 cause Canada to become a popular destination for climate and immigration refugees, contributing to further housing demand. This persistent demand will drive up housing costs, making it an even more valuable commodity.

    Final Thoughts 

    The BoC keeps Canada’s policy rate at a 23-year high, and impacts will be felt among renewers the most 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!

    in this series Bank of Canada Guide

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