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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 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 in January took a step in the right direction, coming in at 2.9% 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 end of January. 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 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%).

    February 2023 vs. February 2024 – What Changed

    Today, Canada’s average home price is $707,800, while a year ago, it was $705,000, an increase of 0.4%. However, the lowest 5-year variable rate at nesto has increased from 5.45% a year ago to 5.90% today. This change means that Canada’s average monthly mortgage payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $3,447 to $3,614. Canada’s average national rent increased approximately 12% from $1,888 to $2,146 over the same period. The interest component of the mortgage payment has increased by $167 from a year ago; comparatively, average rent prices increased by $257 year-over-year.

    TL; DR—In Canada, the monthly mortgage payment increased by 4.85% from a year ago, while Canada’s aggregate benchmark home price increased by 0.4% during the same period.

    Today, Quebec’s average home price is $461,600, while a year ago, it was $450,800, an increase of 2.40%. However, the lowest 5-year variable rate at nesto has increased from 5.45% a year ago to 5.90% today. This change means that the average monthly mortgage payment in Québec (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $2,204 to $2,357. Meanwhile, the average rental prices in Québec increased approximately 5% from $1,860 to $1,958 over the same period. The interest component of the mortgage payment has increased by $153 from a year ago; comparatively, average rent prices increased by $98 year-over-year.

    TL;DR – Within Quebec, the monthly mortgage payment increased by 5% from a year ago, while Quebec’s average home price increased by 2.40% during the same period.

    Today, Ontario’s average home price is $849,000, while a year ago, it was $852,700, a decrease of 0.43%. However, the lowest 5-year variable rate at nesto has increased from 5.45% a year ago to 5.90% today. This change means that Ontario’s average monthly mortgage payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $4,169 to $4,435. Meanwhile, the average rental prices in Ontario increased approximately 8% from $2,260 to $2,456 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 $196 year-over-year.

    TL; DR—In Ontario, the monthly mortgage payment increased by 8% from a year ago, while Ontario’s aggregate benchmark home price decreased by 0.43% during the same period.

    Today, Alberta’s average home price is $487,400, while a year ago, it was $448,000, an increase of 8.79%. However, the lowest 5-year variable rate at nesto has increased from 5.45% a year ago to 5.90% today. This change means that Alberta’s average monthly mortgage payment (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $2,190 to $2,488. Meanwhile, the average rental prices in Alberta increased approximately 18% from $1,386 to $1,690 over the same period. The interest component of the mortgage payment has increased by $298 from a year ago; comparatively, average rent prices increased by $305 year-over-year.

    TL; DR—In Alberta, the monthly mortgage payment increased by 18% from a year ago, while Alberta’s aggregate benchmark home price increased by 8.79% during the same period.

    Today, British Columbia’s average home price is $952,100, while a year ago, it was $916,700, an increase of 3.86%. However, the lowest 5-year variable rate at nesto has increased from 5.45% a year ago to 5.90% today. This change means that the average mortgage monthly payment in BC (on an insurable 25-year mortgage with 20% equity/downpayment) has increased from $4,482 to $4,861. Meanwhile, the average rental prices in BC increased approximately 2% from $2,478 to $2,529 over the same period. The interest component of the mortgage payment has increased by $379 from a year ago; comparatively, average rent prices increased by $51 year-over-year.

    TL; DR—In British Columbia, the monthly mortgage payment increased by 8.47% from a year ago, while BC’s aggregate benchmark home price increased by 3.86% 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. Multiple rate holds 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.

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    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.

    Extending Your Mortgage Term

    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

    Compare renting versus owning costs, where annual 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.

    Average rents in Canada increased by 12% annually compared to last January, whereas during the same period, average benchmark home prices nationally increased by 0.4%.

    Average rents in Quebec increased by 5% annually compared to last January, whereas during the same period, average benchmark home prices provincially increased by 2.4%.

    Average rents in Ontario increased by 8% annually compared to last January, whereas during the same period, average benchmark home prices provincially decreased by 0.43%.

    Average rents in Alberta increased by 18% annually compared to last January, whereas during the same period, average benchmark home prices provincially increased by 8.79%.

    Average rents in British Columbia increased by 2% annually compared to last January, whereas during the same period, average benchmark home prices provincially increased by 3.86%.

    Home Prices Are Only Headed Up

    As home sales are forecasted to increase throughout most parts of Canada this spring and summer, the current rate pause could increase housing unaffordability. The BoC’s subsequent deliberation is due on April 10th, 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 ageing 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 holds Canada’s benchmark policy rate at a 23-year high while waiting for confirmation that its inflation fight is done. February’s CPI reading is due on March 19th and well before the April 10th announcement. If the inflation needle continues moving down in the same direction as January’s reading, the probability of a rate cut could improve. 

    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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