As anticipated, this past Wednesday (June 5th) the Bank of Canada announced it was reducing its benchmark interest rate by 25 basis points (.25%) bringing it down to 4.75%. This benchmark rate, also known as the overnight rate, influences a bank’s prime rate, which in turn affects interest rates on various financial products/services including mortgages.
For homeowners and prospective buyers, this interest rate cut is promising news. To some degree, sellers who have been trying to sell their homes or other property for months may also get a sense of relief from this announcement. At the same time, without further rate cuts in the months ahead, mortgage rates will for the foreseeable future, remain well above the historically low rates that propelled the robust if not crazy real estate market we saw back in 2020 and 2021.
Over the past two years, the Bank of Canada raised its policy rate from 0.25% in March 2022 to 5% by July 2023. This move was intended to curb both inflation as well as serving to cool Canada’s hot housing market. This policy change led to higher mortgage rates which had a profound impact on both affordability and sales for many wishing to buy a home, a second property or simply those wishing or needing to move up to something larger.
This news will be no doubt mark the beginning of a downward trend in rates. As rates continue to drop, mortgage costs will become more manageable thereby helping to restore home sales and the dreams of would be buyers especially those purchasing for the first time.
Both my daughter and son are first time buyers each of whom are awaiting the completion of new homes now under construction, one in Meaford and the other, my daughter’s family on Maui, Hawaii. For many who have perhaps been standing in the sidelines, this rate cut will signal that mortgage rates will continue to decrease in the months ahead and they can look forward in good time to perhaps proceeding with a long awaited purchase. While today’s rate cut won’t drastically lower mortgage costs to reignite the real estate market short term, it may encourage new buyers to begin their home search, anticipating better affordability and more options in the near future.
Variable rate mortgages vary depending on the lender and structure of the loan. Some adjust mortgage payments automatically with changes in the prime rate, while others keep payments steady but extend the amortization period when rates rise.
With this rate decrease, the impact on your mortgage will depend on its structure or format. If your payments fluctuate with the prime rate, you might see a reduction in your payments. If your payments stay the same, more of your payment will go towards the principal versus interest. If your lender’s prime rate decreases, you’ll benefit either through lower monthly payments or by paying off your mortgage faster.
While the rate cut is good news, those renewing their existing mortgages will still face higher rates compared to previous years. If you took out a mortgage in 2022 or earlier, your rate might have been around 2%. With today’s policy rate over 4% higher than in 2022, your renewal rate and monthly payments will be significantly higher. With housing inventory listed for sale on the MLS® System for the Southern Georgian Bay area at the highest level we have seen since 2015, I believe some of these properties are listed for sale as the result of their owners now facing significantly higher carrying costs at mortgage renewal time. Looking at the history for many of the new MLS® listings coming onto the market I note than many were bought in 2020 and 2021 during the peak of the market. Now, here we are roughly three years later and many of the properties bought two to three years ago are back on the market. It begs the question do the sellers have other plans/reasons to move or have the higher mortgage rates put them in a position where they have or wish to sell thus lessening their financial burden? The latter certainly applies in some cases and we may see a return to “power-of-sales” in the months ahead.
As you approach your mortgage renewal, it’s essential to understand what your new payments could be and budget accordingly. As always, I encourage you to get professional advice. Inquire with your bank or mortgage lender to learn what your options are and how you can best manage a renewal that may stress your finances. Although the rate reduction is positive, many renewing their mortgages in the next 6 to 18 months will encounter significantly higher rates compared to their current terms.
Whether you’re a first-time buyer or buying to meet the needs of a growing family, renewing, or managing a variable rate mortgage, your next steps depend on your income and financial circumstances. Getting some sound and professional advice will help you make an informed decision about what best suits your needs and financial abilities.
As a Market Value Appraiser (MVA) for residential properties, I have the expertise & skills to provide you will an accurate assessment as to what your property is worth in today’s market. Knowing what you home, condominium or other property is worth today is also a good place to start and I have had several such requests in the past month or two. Contact Me for a no obligation valuation of your property or to confidentially discuss your real estate needs and or objectives. rcrouch@sothebysrealty.ca or 705-443-1037.
Note: The author is a Broker, Market Value Appraiser-Residential with Sotheby’s International Realty Canada and a Past President (2008) of the Lakeland’s Association of REALTORS®.