With the Bank of Canada reducing its overnight rate to 4.75% last week, homeowners with variable-rate mortgages will see an immediate decrease in their monthly payments. It’s a perk fixed-rate mortgage holders don’t have, however, a variable rate requires an appetite for risk and reward because the rate floats based on the prime rate set by banks, meaning monthly payments increase (risk) or decrease (reward) with the rate. Variable-rate holders with an interest rate of prime minus 0.5% will have a mortgage rate of 3.5%, if the prime rate is 4%. If the prime rises to 4.5%, the variable rate increases to 4% and if it decreases to 3.5%, the mortgage rate drops to 3%. Homeowners with a five-year fixed-rate mortgage pay the same rate through the life of the mortgage, with the comfort of knowing their mortgage payments will not change, even if interest rates in the market fluctuate. Those with fixed rates are likely to have their rates reduced, based on the Bank of Canada’s move last week. The bank has four more rate announcements in 2024, the next being July 24, followed by September 4, October 23 and December 11 and if it continues rate cutting, as some market watchers believe it will do, variable rate holders will see their monthly payments decrease. One market watcher, James Laird, co-ceo of Ratehub.ca and president of CanWise mortgage lender, said in a statement last week, the bank has moved into the fourth phase of four in rate management. “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,” said Laird, adding, “usually if there’s one rate cut, more will follow. Now, Canadians will be wondering where the bank wants to get to and when, which will be exciting if you are a borrower.” Other market watchers, Robert Hogue and the team at RBC Economics, said last week they could see the bank’s rate fall to 4% by the time of the December announcement. Zoocasa, an online real estate portal, has calculated the average monthly mortgage payment on a five-year variable following the rate cut. “Benchmark prices are from the Canadian Real Estate Association,” says Zoocasa..”Total mortgage amount accounts for a 10% down payment for any benchmark price under $1 million and a 20% down payment for benchmark prices over $1 million. Average monthly payments were determined using the total mortgage amount, which is the benchmark price minus the down payment. OL refers to the overnight lending rate.” Here’s how variable rates could vary for the balance of the year, pending more Bank of Canada reductions, in the five largest markets in Canada. Vancouver: With a benchmark price of $1,205,800, mortgage of $964,640 and OL of 4.75%, the monthly payment is $6,143. If the OL decreases to 4%, the monthly payment would be $5,583. Calgary: With a benchmark price of $587,300, mortgage of $544,956 and OL of 4.75%, the monthly payment is $3,390. If the OL decreases to 4%, the monthly payment would be $3,154. Edmonton: With a benchmark price of $390,200, mortgage of $9362,067 and OL of 4.75%, the monthly payment is $2,252. If the OL decreases to 4%, the monthly payment would be $2,096. Greater Toronto: With a benchmark price of $1,128,100, mortgage of $902,480 and OL of 4.75%, the monthly payment is $5,614. If the OL decreases to 4%, the monthly payment would be $5,223. Montreal: With a benchmark price of $530,300, mortgage of $492,065 and OL of 4.75%, the monthly payment is $3,061. If the OL decreases to 4%, the monthly payment would be $2,848.
