Another Step Down to 4.5%: What Will Change in Real Estate?
On June 24th, the Bank of Canada (BoC) announced a slash in its benchmark interest rate, bringing it down to 4.5%. This rate cut follows the June 5th reduction and was a step that many experts had foretold. Though expected, the lower rate has definite implications for real estate in Canada.
On the face of it, the modest rate cut is a positive sign that may give a nudge to potential home buyers sitting on the fence. There is hope that the incremental changes will bring in long-awaited affordability, and lower mortgage costs may give first-time homebuyers a little more confidence.
The previous cut in June had already shown a slow upward change in national home sales and newly listed properties. This consecutive second cut is expected to bring in a renewed surge of activity to the housing markets as buyers make their presence felt.
However, it pays to be cautious, and the BoC is understandably wary of sparking a rise in housing prices that could offset the gains in affordability. Buyers should weigh their options carefully and seek professional advice to ensure they make informed decisions that do not boomerang into financial chaos.
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BoC’s Delicate Balancing Act
The BoC’s decision is based on its assessment of the broader economic landscape in the country, particularly inflation. The central bank noted in its announcement that its preferred Consumer Price Index (CPI) “core measures” have trended under 3% in recent months – an indication that the battle against inflation battle is giving the preferred results.
More cuts may be on the horizon, with the central bank’s cutting cycle potentially settling at 3%. However, this requires multiple additional rate cuts, and the markets will closely watch for clues about the BoC’s next moves.
The BoC intends to strike a balance between supporting economic growth and maintaining its inflation target of 2%. Future decisions will be based on incoming data and the bank’s assessment of the outlook on inflation. This means that Canadians must stay attuned to the changes in the economic landscape in order to stay afloat.
Prime Rates and Mortgage Rates: The Immediate Effect
Canada’s major banks, including RBC, BMO, TD, Scotiabank, and CIBC, quickly responded to the announcement.
Each of these banks brought down their prime rates to 6.7%. This reduction will directly impact prime-based borrowing products, including variable-rate mortgages and home equity lines of credit (HELOCs).
For homeowners with variable-rate mortgages, their mortgage rates will adjust downward. Those with fixed-rate mortgages may need to wait until their term expires to take advantage of the lower prime rate.
Some lenders have already begun adjusting their fixed-rate offerings, and the five-year Government of Canada bond yield is hovering in the lower 3.3% range. This may mean fixed-rate mortgage rates will reduce further, providing more affordable options for first-time homebuyers.
Renewals Maybe Challenging
Variable-rate mortgage holders are the most likely to cheer, as their monthly payments will go down proportionately with the lower benchmark rate. It is not all gloom for homeowners with fixed-rate mortgages – it is true that their payments will remain as-it-is, but they can benefit from refinancing at lower rates at the end of their terms.
For homebuyers looking for peace of mind, locking in a mortgage rate can protect them from any potential rate increases during the process. As always, they must carefully consider the pros and cons of mortgages and choose the best type and term for their needs.
But for the large number of Canadian homeowners who are staring at mortgage renewals in the near future, it is a tough spin. These borrowers locked in their mortgages when rates were at their lowest, and now the potential higher monthly payments can be a dire shock. The already-stretched household budgets may need to stretch a little further, and many homeowners will need to take more proactive measures to lessen the impact.
Talk to your lenders early, before the actual end of your mortgage term. Homeowners can look at several options, such as accelerating payments, consolidating debt, or even refinancing to extend their amortization and mitigate the immediate financial burden. Take the bull by its horns and plan your best approach to withstand the shift to higher rates.
Mortgage Brokers to the Rescue
Professionals such as mortgage brokers can assist homebuyers and homeowners with their expertise and access to a wide range of lenders and products. Often, if not all the time, they can secure better rates and terms than the borrower can find on their own.
Mortgage brokers can help their clients through the process, handling and reviewing the paperwork and ensuring they get the best solutions for their unique circumstances.
More Rate Cuts?
There is a lot of speculation and varied theories about the Central bank’s future announcements.
There is an overwhelming indication that the next announcement will also be a decrease, but the BoC is keeping its cards close to its chest. Analysts believe the BoC’s cutting cycle may ultimately bottom out at 3%. Putting speculations to rest, the central bank has consistently emphasized that its actions will be data-driven. However, the door is open for further adjustments as the economic landscape changes shape in the future.
The BoC’s upcoming announcements are scheduled for September 4, October 23, and December 11, 2024. Until then, fingers crossed and keep a keen eye on the market trends.
Conclusion
The Bank of Canada’s latest decision to cut its benchmark interest rate to 4.5% has set the stage for a new chapter. This decision has seen a domino effect with the subsequent prime rate reductions by the country’s major banks. And, of course, there are implications for homebuyers, homeowners, and property investors.
It is a delicate balancing act, as the central bank aims to support economic growth while maintaining its inflation target. As the cutting cycle continues (hopefully!), we advise buyers to be ready to seize the opportunity.
Stay informed, seek professional guidance, and make decisions that align with your long-term financial goals. For anything else, do contact us – we would love to hear from you.
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