The Bank of Canada’s rate cut will have an immediate effect on variable rate mortgage holders and those with a home equity line of credit (HELOC) balance, says James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender. “If you have been riding a variable rate or have a balance on a HELOC, this is the announcement you have been waiting for,” says Laird. “Those who have stuck with a variable rate will be really pleased this morning to see the rate they are paying finally move off a multi-decade high.” For every .25% decrease, floating variable-rate mortgage holders can expect to pay $15 less per $100,000 of mortgage. It will take longer to affect fixed rate mortgages, says Laird. “The five-year Government of Canada bond yield has dropped about 30 basis points in the last week and fixed mortgage rates have not yet moved,” he says. “Most lenders won't change rates right ahead of a Bank of Canada announcement, but now that they have seen this, consumers should expect fixed rates to move lower.” The rate cut is the fourth phase of the pandemic rate policy and likely signals future cuts, says Laird. “Phase 1 was dropping rates super aggressively; Phase 2 was increasing them dramatically to fight inflation; Phase 3 was keeping them elevated to tamp down inflation; Phase 4 is to move to a less restrictive rate policy,” he says. “We are in a new situation now where usually if there is one rate cut, more will follow.” The lower rate should also bring relief to those with an upcoming mortgage renewal, says Victor Tran with RATESDOCA.“Those up for renewal in the coming months are facing monthly payment increases of up to 60%, according to the Bank of Canada’s annual Financial Stability Report and a .25% is a step towards easing those increases," says Tran. “We will likely see an uptick in mortgage-holders considering variable rates on renewal to take advantage of the downswing, though the spread between fixed and variable is still significant and the Bank of Canada may spread decreases out over a number of months.” “It’s unlikely that the Bank of Canada will drop rates as quickly or as steeply as many would like. Rate decreases may loosen up what has been a sluggish housing market for much of the year, but the buyers that were limited by high rates before the cut are likely to still be limited by high rates after a 25bp drop.” The majority of borrowers with fixed-rate mortgages are bracing for increased payments regardless of whether rates rise or fall, reports Canadian Mortgage Professional (CMP). “It’s just so daunting to look at the situation now because even when you’re looking at 4.5% or 5% prime interest rates, I remember when I first got into the market, we were paying 2% to 3%,” Ryan Ballantine, a Calgary homeowner whose mortgage is up for renewal this summer, told CMP. More than 70% of existing Canadian mortgages have fixed rates up for renewal within the next three years. This year, 13% of fixed-rate mortgages will be renewed, rising to 23% in 2025 and 31% in 2026, reports CMP. Going forward, Bank of Canada Governor Tiff Macklem said Wednesday if inflation continues to ease, “it is reasonable to expect further cuts to our policy interest rate,” adding the central bank would make its decisions “one meeting at a time.” RBC Economics believes more cuts are coming this year. “With the first interest rate cut now out of the way, the focus will shift towards the pace and amount of further rate cuts,” says RBC in a note. “On that front, the BoC offered few clues outside of reiterating that upside inflationary risks still remain, and decisions will be made ‘one meeting at a time.’” “Our own expectation remains that there will be three more rate cuts this year to lower the overnight rate to a still restrictive 4% by the end of 2024.”
