On June 5th, the Bank of Canada (BOC) announced a 25 basis point cut to its key  overnight lending rate, lowering it to 4.75%.



The welcomed decrease was the Bank’s first rate cut since March 2020 and followed a  period of intense monetary policy tightening and maintenance, where, between March  2022 and July 2023, the Bank of Canada raised interest rates ten times.



James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender  explained that we are now in the fourth phase of the pandemic rate policy. “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.”



Addressing the question on everyone’s mind: “Usually if there’s one rate cut, more will  follow,” Laird says. “Now, Canadians will be wondering where the Bank wants to get to  and when, which will be exciting if you are a borrower.”


 

What is a Variable-Rate Mortgage?

A variable-rate mortgage has an interest rate that can change over time, depending on  the prime rate.



The prime rate is a baseline interest rate set by banks, and each lender will add a  certain percentage to this rate.



Variable-rate mortgages are ideal for those who can handle risk and appreciate budget  flexibility. 

Additionally, they may enable you to pay off your mortgage faster. 



For example, imagine you have a variable-rate mortgage with an interest rate set at  prime minus 0.5%. If the current prime rate is 4.0%, your mortgage rate will be 3.5%.  Here’s how changes in the prime rate affect your mortgage.


• If the prime rate rises to 4.5%: Your mortgage rate increases to 4.0%, resulting  in higher interest payments. 

• If the prime rate drops to 3.5%: Your mortgage rate decreases to 3.0%, resulting  in lower interest payments.


Meanwhile, a fixed-rate mortgage keeps the same interest rate throughout the entire  loan term.



For example, if you have a five-year fixed-rate mortgage at 4.79%, you will pay 4.79%  interest for the full five years.



This guaranteed stability gives borrowers the peace of mind that their mortgage  payments will not change, even if interest rates in the market fluctuate.


However, once the five-year term ends, the borrower will need to renegotiate their  mortgage.


The key difference is that in variable-rate mortgages, interest rates can change based  on the prime rate, causing your monthly payments to increase or decrease.



In comparison, fixed-rate mortgages have interest rates that stay the same for the loan  term, providing stability in monthly payments but requiring renegotiation at the end of  the term.


 

How Rate Fluctuations Affect Your 5-Year Variable  Mortgage Term

Since variable-rate mortgage holders are immediately impacted by changes in interest  rates, Zoocasa has calculated the average monthly mortgage payment on a 5-year  variable following the rate cut.



Benchmark prices are from the Canadian Real Estate Association. Total mortgage  amount accounts for a 10% down payment for any benchmark price under $1M, and a  20% down payment for benchmark prices over $1M.



Average monthly payments were determined using the total mortgage amount, which is  the benchmark price minus the down payment.



Toronto payments are projected to decrease by approximately $155 per month,  resulting in an annual savings of around $1,860 for homeowners.


 

Falling Rates Could Revive Housing Market 

After all, high borrowing costs can be a major deterrent for buyers and sellers alike.


A 2024 Zoocasa survey of 1,577 people across the US and Canada found that 51% of  non-homeowners cited high home prices as the main reason for not purchasing a home,  despite their aspirations of homeownership.



If lending rates continue to drop, the real estate market is likely to see significant  changes. “With lower lending rates, prospective buyers will be motivated to get off the  sidelines, ultimately leading to more sales activity and the potential for an increase in  prices.



Now is an excellent time to get off the sidelines, before the competition gets too fierce,  explore your options and take advantage of the greater negotiating power you have with  the current surge in inventory,” explains Carrie Lysenko, Zoocasa CEO.



The BOC’s next announcement is scheduled for July 24, 2024.


If you have any questions about mortgages, the differences between variable and fixed  rate mortgages and which one is right for you and/or you are thinking now may be the  right time to buy/sell or both, give me a call and we can discuss your own specific situation. You can call 905-683-7800 anytime and ask for me.




 

Thanks for reading today’s BLOG!!!

Brian Kondo
Sales Representative / Team Leader
The Brian Kondo Real Estate Team
Re/Max Hallmark First Group Realty Ltd.
905-683-7800 office
905-426-7484 direct
brian@briankondo.com
www.BrianKondo.com
www.BrianKondoTeam.com

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