Bank of Canada Decreases Rate 0.25% – What This Means For You And Your Mortgage
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Bank of Canada Decreases Rate 0.25% – What This Means For You And Your Mortgage
The Bank of Canada (BoC) has reduced its benchmark policy rate by 25 bps (0.25%), signalling a continued easing of monetary policy to tackle inflation while considering a slowing economy.
The Bank of Canada is grappling with recessionary issues such as falling output per capita and increasing unemployment. The rise in interest rates, intended to curb inflation, has reduced household purchasing power, resulting in decreased demand and job losses. Although population growth has kept overall GDP stable, household spending per person or per capita GDP has notably declined. The unemployment rate is rising, and recent retail sales declines indicate a possible economic downturn.
Given these challenges, the Bank of Canada has decided to lower interest rates, shifting its focus away from simply controlling inflation. This rate reduction aims to tackle the current economic difficulties, although rates are not expected to return to the low levels seen in 2021. This decision reflects a recognition of the economy’s delicate condition and effect on employment, bond markets, and housing prices.
The Bank of Canada Policy Rate Is Now 4.25%
The Bank of Canada’s recent decision to lower its key interest rate by 25 bps (0.25%) has significant implications for mortgage rates, inflation, and the overall Canadian economy. This move is intended to foster economic growth while managing inflation, reflecting the central bank’s responsiveness to current economic conditions. Homeowners and prospective buyers should consider how this adjustment will affect their financial strategies, considering the prime rate, shifts in monetary policy, and the broader effects on the job market.
The Bank of Canada could modify its policy interest rate up to 8 times a year, enabling it to respond to economic fluctuations. Changes to the overnight rate will impact all mortgage rates. Still, your personal mortgage rate will vary based on factors such as creditworthiness, loan-to-value (LTV) ratio and the mortgage type/term selected. With the possibility of payment shock at renewal, it’s crucial to budget and plan carefully, as the interest component of payments could rise significantly.
Explore how these recent changes might influence your mortgage and financial planning.
Why The Bank of Canada Continued Its Rate Cutting Cycle
The Bank of Canada’s decision to cut interest rates impacts all Canadians, affecting everything from mortgage payments to investment strategies. To improve cash flow, prioritize high-interest debts and consider postponing non-essential expenses. Postponing purchases will strengthen your personal inflation rate and help ease inflation sooner.
Inflation
Inflation measured through Canada’s Consumer Price Index (CPI) has been a significant concern for the past three years, but it is now easing—it slowed to 2.5% in July 2024 from the previous year, marking the slowest growth since its peak in March 2021. This slowdown is widespread; while shelter costs are still elevated, their year-over-year increase has dropped to 5.7%, influenced by falling prices for electricity, mortgage interest, rent, and heating oil. The encouraging softening trend in last month’s inflation prompted the Bank of Canada to continue easing monetary policy.
The conversation around controlling inflation has generated excitement among many, although not everyone feels the same way. While there is growing support for reducing inflation, we need to be careful; managing inflation is simpler than tackling the issues that come with deflation. The spike in inflation at the end of 2021 and the beginning of 2022 prompted the Bank of Canada and other central banks to increase interest rates to address the problem.
Now, two and a half years later, the situation regarding inflation has improved, but we must keep in mind that there are limited effective solutions for deflation. Japan’s ongoing battle with deflation since the late 1980s reminds us of these challenges. Thus, we should be cautious about celebrating falling inflation rates, as a sudden shift to deflation could catch policymakers like Tiff Macklem off guard when facing future obstacles.
Neutral Rate
The Bank of Canada views the neutral rate as essential for its economic forecasts and monetary policy decisions. It serves as a significant benchmark in Monetary Policy, shaping the Bank’s strategy during notable interest rate changes. The Bank increased the neutral rate from 2.50% in April 2023 to 2.75% in April 2024, now establishing a range between 2.25% and 3.25%.
Canada’s neutral rate now mirrors adjustments akin to the US Federal Reserve’s reassessment of its neutral rate. Even with today’s rate cut, there remains almost a 150 basis point gap between the current policy rate and 2.75%, suggesting that the Bank might anticipate further reductions in the ongoing monetary cycle due to falling productivity.
US Economy
The Bank of Canada (BoC) monitors the US economy closely to inform its interest rate decisions. A key factor is the interest rate differential between the two nations, as a significant gap can influence the value of the Canadian dollar and potentially exacerbate inflation due to foreign exchange. The BoC also examines how the US economy affects Canadian exports and the risks tied to a weakening US economy.
Following the rate cut in July, Governor Macklem highlighted the central bank’s confidence that inflation will likely decrease, even with potential challenges ahead. The July CPI data came in lower than expected, indicating that the Bank of Canada might find implementing further rate cuts from the current high levels easier. Future rate markets predict an additional 150 basis points (1.50%) in cuts by mid-2025.
The Bank of Canada’s choice to reduce interest rates this year was reasonably straightforward, but the situation for the U.S. Federal Reserve is more complicated. Strong GDP growth and rising inflation in the US earlier this year have prevented the Fed from moving as swiftly as other advanced economies. However, disappointing labour market data in July raised concerns about a potential slowdown, with the unemployment rate reaching levels typically seen during recessions. The slowdown is more of a normalization than a drastic economic downturn, as the unemployment rate, although increasing, remains low. There is an expectation of a rise in temporary layoffs in July, which could see some recovery in August, resulting in more interest rate cut reductions in September and December.
The US economy is slowing, with reduced GDP growth, July inflation, and moderating unemployment revised down for last year. The US Federal Reserve is expected to lower rates in its September meeting, opening the way for the BoC to usher in more aggressive cuts here. The BoC remains cautious due to limited US data and the timing of Fed rate cuts, as it must weigh the US economic landscape while also tackling issues affecting Canada’s economy.
The Fed’s key inflation measure, core Personal Consumption Expenditures (PCE), delivered a slightly better outcome for July 2024 than expected, coming in at 2.6% year-over-yearOver the past three months, the annualized rate has dipped below the target at just 1.7%. Furthermore, the three-month rate for the critical supercore measure, which excludes housing from core services, has fallen to a cycle low of 2.0%.
The increasing unemployment rate in the United States could have a significant impact, potentially leading to lower mortgage rates in Canada. The Fed’s dual mandate to manage inflation and unemployment allows it to reduce interest rates when there are considerable job losses. This move can influence the Bank of Canada, as lower rates in the US typically put downward pressure on Canadian bond yields and interest rates. Additionally, a drop in employment levels in the US may lead to reduced inflation, which could prompt the Bank of Canada to lower rates to stimulate its economy.
The relationship between unemployment and interest rates in Canada is complex and less direct than in the US. While rising unemployment in the US can result in lower interest rates, the Bank of Canada must weigh various factors before making any changes. The interaction between US economic conditions and Canadian monetary policy underscores the significance of global economic trends, indicating that Canadian mortgage rates could be affected by a thorough examination of US employment patterns and their broader effects.
Housing
Data from the Canadian Real Estate Association (CREA) shows that home prices declined by more than 3% nationally in July across all property types, while the total average rent increased by 7%.
CREA also reported a sales-to-new-listings ratio (SNLR) of 55%, indicating a slow but balanced market across most regions and nationally. The benchmark price of resale residential homes sold across Canada in July 2024 was $724,800, which decreased by 3.9% compared to a year ago.
How Bank of Canada Rate Changes Affect Your Mortgage Payments
For example, if you have a $500,000 mortgage secured at nesto’s 5-year variable low rate of
Common mortgage amounts and corresponding mortgage payments on nesto’s 5-year variable low rate of
September 2023 vs. September 2024 – What Changed
How has housing affordability changed since last year? Housing affordability has shifted significantly over the past year. While renting offers immediate shelter, it doesn’t allow for equity building like homeownership. Rent prices have increased faster than homeownership costs, making it difficult for many renters to transition to ownership. Postponing entry into the housing market might result in lost opportunities and a more challenging housing landscape. Let’s simplify costs and compare renting versus homeownership.
Today, Canada’s benchmark home price is $717,800, while a year ago, it was $753,900, which has decreased by 3.9%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to
TL; DR— Canada‘s monthly mortgage payment decreased by 8.83%. Meanwhile, average home prices decreased by 3.9%, and average national rents have increased by 5.0%. In dollars, mortgage payments have decreased by $341.31, average home prices have decreased by $29,100, and average national rents have increased by $56.
Today, Quebec’s benchmark home price is $487,500, while a year ago, it was $466,600, which has increased by 4.1%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to
TL; DR—In Quebec, the monthly mortgage payment decreased by 1.40%, average home prices increased by 4.1%, and average provincial rents have increased by 2.0%. In dollars, mortgage payments have decreased by $32.66, average home prices have increased by $18,500, and average national rents have increased by $39.
Today, Ontario’s benchmark home price is $866,700, while a year ago, it was $918,500, which has decreased by 4.4%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to
TL; DR—In Ontario, the monthly mortgage payment decreased by 9.42%, average home prices decreased by 4.4%, and average provincial rents have decreased by 4.0%. In dollars, mortgage payments have decreased by $443.80, average home prices have decreased by $41,200, and average national rents have decreased by $24.
Today, Alberta’s benchmark home price is $517,300, while a year ago, it was $478,500, which has increased by 8.11%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to
TL; DR—In Alberta, the monthly mortgage payment increased by 2.53 %, average home prices increased by 8.11%, and average provincial rents have increased by 15%. In dollars, mortgage payments have increased by $61.99, average home prices have increased by $38,800, and average national rents have increased by $272.
Today, British Columbia’s benchmark home price is $977,900; a year ago, it was $995,400, which has decreased by 1.76%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to
TL; DR—In British Columbia, the monthly mortgage payment decreased by 6.83%, average home prices decreased by 1.76%, and average provincial rents have decreased by 2%. In dollars, mortgage payments have decreased by $348.86, average home prices have decreased by $17,500, and average national rents have decreased by $51.
*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.
How Bank of Canada Rate Changes Affect Your Mortgage Payments and Interest Costs*
September 2023
Fixed Rate: 5.34%
Home Price: $753,900
20% Downpayment: $150,780
Mortgage Needed: $603,120
→ $3,625.42 monthly mortgage payment
→ $151,020 in total interest over 5-year term
September 2024
Fixed Rate: 4.34%
Home Price: $717,800
20% Downpayment: $144,960
Mortgage Needed: $579,840
→ $3,157.88 monthly mortgage payment
→ $117,354 in total interest over 5-year term
September 2023
Variable Rate: 5.95%
Home Price: $753,900
20% Downpayment: $150,780
Mortgage Needed: $603,120
→ $3,867.50 monthly mortgage payment
→ $170,938 in total interest over 5-year term
September 2024
Variable Rate:
Home Price: $717,800
20% Downpayment: $144,960
Mortgage Needed: $579,840
→ $3,526.19 monthly mortgage payment
→ $148,575 in total interest over 5-year term
*For illustrative purposes only, when comparing against nesto’s 5-year lowest fixed and adjustable insured and insurable mortgage rates, with a 20% downpayment & 25-year amortization, using Canada’s composite average home price data as made available through CREA. Other limiting terms & conditions apply. Rates are subject to change without notice.
How You Can Prepare Post Bank of Canada Rate Decision
In the wake of the Bank of Canada’s decision to cut the policy rate again, 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 rate holds on your early renewals remain a viable choice, while extended mortgage terms could provide a hedge against resurging inflation.
Potential homebuyers might save more in the long run with a slightly higher initial payment if it results in a lower home price and a smaller mortgage. Those considering waiting to buy this fall should note that delays could lead to higher costs beyond increased mortgage rates, as reduced rates may boost demand for limited housing. With inflation under control, the Bank of Canada is expected to lower rates, which could attract more buyers and increase property values.
For well-qualified homebuyers and homeowners up for renewal, an adjustable-rate mortgage (ARM) could provide immediate savings on your budget as the BoC continues to reduce policy rates over the upcoming months. Unlike a variable-rate mortgage (VRM), an ARM’s monthly payment will adjust with each adjustment in the lender’s prime rate. The market is ever-changing, and understanding the mortgage rate forecast is critical to optimizing your mortgage strategy.
Mortgage Strategy Impact
Every rate cut by the Bank of Canada can significantly influence your financial situation. For instance, a shift of 100 basis points (1%) in interest rates can enhance your buying power by 10%. Even a modest 0.25% reduction could lower your mortgage payment by 2.5%. The latest interest rate decision has relieved those with variable-rate (VRM) and adjustable-rate mortgages (ARM), leading to slightly lower interest payments.
- Fixed-rate stability: Fixed-rate mortgages buffer against rate fluctuations, but planning for future renewals is essential.
- Variable-rate benefits and challenges: VRMs offer potential interest savings and shortening amortization, but rate changes can impact payments. Borrowers with VRMs from two years ago may have passed their trigger rates or are nearing their trigger points and may be at risk of higher payments due to renewal payment shock.
- Adjustable-rate potential and challenges: ARMs can provide immediate savings with each prime rate decrease but may strain monthly budgets.
- HELOC strategies: HELOC holders should evaluate their debt and consider consolidating into fixed-rate options for stability and a more predictable principal balance pay down.
- Hybrid mortgage flexibility: Collateral-charge mortgage holders could consider hedging with different term lengths or explore hybrid mortgages to split their mortgage balance between fixed and variable rates.
Early Renew Your Mortgage
Given the uncertainty of the Bank of Canada’s policy rate, considering an early mortgage renewal may be wise. If your budget is tight, switching from a variable to a fixed-rate mortgage can stabilize payments for 3 to 5 years and potentially lower monthly costs as long-term fixed rates have decreased. It’s advisable to consult your mortgage expert about renewal or refinancing to fully understand and calculate the cost-saving benefit of renewing or refinancing.
When switching lenders, the federal government allows borrowers with insured mortgages to re-qualify at their contract rate, providing more flexibility for renewals or converting to a fixed rate. Stay informed about these options and discuss them with your lender to understand potential savings.
Today, at nesto’s lowest variable rate today, households could qualify with $18,711.69 in annual income for every $100,000 mortgage balance versus the $22,538.46, which is required to stress-test a similar mortgage. Or even less so on nesto’s lowest fixed rate today.
Extending Your Mortgage Term
Considering the recent rate cut from the Bank of Canada, extending your mortgage term can be an option. The blend-and-extend method lets you renew early at a lower weighted rate, which can help you lock in a lower payment. However, if rates drop after you extend, you might pay more interest in the long run. A mortgage refinance is often a simple way to tap into your equity or enhance your cash flow by extending your amortization or consolidating higher-interest debts into one manageable payment.
Renting While You Wait To Buy
Amassing a substantial downpayment is often the first hurdle Canadians encounter in their quest for homeownership. This financial milestone, however, can be reached through various avenues, each tailored to different financial situations and goals.
Compare renting versus owning costs, where annual rent may cover mortgage payments, albeit renting doesn’t build equity. Inflation will continue to increase Canadian 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.
Final Thoughts
The Bank of Canada’s recent 25 bps (0.25%) rate cut signals that further reductions may be on the horizon, but the market may overestimate the extent and speed of these cuts. While the BoC aims to balance inflation control with economic stability, ongoing economic challenges and fluctuations make it difficult to forecast mortgage rates with certainty.
Given the current economic climate and the possibility of further rate fluctuations, nesto’s Prime Time mortgage offers a unique opportunity to secure immediate savings while maintaining flexibility and protection against future uncertainty.
Nesto’s Prime Time mortgage offer presents a compelling solution for those navigating this uncertain rate environment. With Prime Time, you get immediate savings through a variable rate that adjusts with each BoC rate cut, including an initial discount to compensate for potentially missing out on a lower fixed rate. Prime Time allows you to switch to a fixed rate without penalty, offering a safety net to lock in your rate anytime.
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!
Why Choose nesto
At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.
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