As predicted by many Canadian economists, the Bank of Canada reduced the overnight lending rate to 4.25% (previously 4.50%), marking a third consecutive rate cut. A majority of bank prime rates will drop to 6.45%.With the July Consumer Price Index (CPI) readings confirming inflation is cooling, this was a very expected result from both economists and industry professionals. The Canadian gross domestic product (GDP) has continued to be underwhelming. Unemployment remains at 6.4% as youth and newcomers to Canada are struggling to find work.
High rent prices and mortgage payments are negatively affecting consumer spending. It’s likely we are starting to see the Bank of Canada shift their efforts into economic growth as inflation is trending in the right direction. This will help promote a continued downwards trend in borrowing costs throughout the next year.
High rent prices and mortgage payments are negatively affecting consumer spending. It’s likely we are starting to see the Bank of Canada shift their efforts into economic growth as inflation is trending in the right direction. This will help promote a continued downwards trend in borrowing costs throughout the next year.
The impact on mortgages.
We will see adjustable and variable rates having the biggest impact. With these rate cuts by the Bank of Canada, those with adjustable rate mortgages will start to feel at ease knowing their payments will drop. Those with variable rate mortgages will notice more of their payment going towards their principal balance rather than interest. In 2021, adjustable/variable rate mortgages were a popular choice with consumers as rates hit historic lows.But in mid 2022 through 2023, we saw the prime rate hit historic highs, causing payments to increase drastically for many adjustable/variable rate mortgage holders in Canada. These mortgages became very unpopular during this time. However, with the recent shift in a lower prime rate, we may see an inverse going forward as consumers with a higher risk tolerance may prefer adjustable/variable rate mortgages over fixed rate mortgages.
Regarding fixed rate mortgages, the Canadian government bond yield is a good indication of where fixed rates can be heading. The Bank of Canada overnight lending rate has no direct impact on fixed rates. With the current economy being weaker than expected, we may see the Canadian government bond yield drop throughout the rest of the year and in 2025, which means fixed rates will follow. It’s important for current fixed rate mortgage holders to note that their payments will not change regardless of the changes in the Canadian government bond yield or the Bank of Canada overnight lending rate until their mortgage renewal date.
The general consensus with economists is that the Bank of Canada will continue to slash rates throughout the remainder of 2024 and 2025, promoting a lower interest rate environment.
Like we’ve already seen, we predict mortgage rates will continue to fall. The CPI target inflation percentage is 2%. Currently the CPI for July 2024 is at 2.5%. The majority of this inflation is being carried by shelter costs as Canadians are still facing higher rent and mortgage payments. With this in mind, we are likely going to see further rate cuts from the Bank of Canada to help bring inflation down to normal levels.
The Bank of Canada has a so-called neutral interest rate. The neutral interest rate is the rate where borrowing costs don’t promote or hinder economic growth. This rate currently ranges between 2% – 3%. Economists are predicting the overnight lending rate can reach 3% by July 2025. With future rate cuts, economists also forecast inflation to reach 2% by the end of 2025, which will help the economy grow, and most importantly help reduce rent and mortgage payments for Canadians.
The Bank of Canada has a so-called neutral interest rate. The neutral interest rate is the rate where borrowing costs don’t promote or hinder economic growth. This rate currently ranges between 2% – 3%. Economists are predicting the overnight lending rate can reach 3% by July 2025. With future rate cuts, economists also forecast inflation to reach 2% by the end of 2025, which will help the economy grow, and most importantly help reduce rent and mortgage payments for Canadians.
Advice for homeseekers.
For those looking to purchase their first home, upsize or downsize, I highly suggest doing so with a pre-planned budget. Knowing your mortgage, heating, property tax, insurance and potential strata costs are crucial when finding a home. You do not want to purchase a property and have unexpected costs. This will add unnecessary financial stress into your life. Getting a mortgage pre-approval is a crucial first step to achieving a planned budget.It’s a good time to start now as we are still in a buyer’s market due to the inventory available on the market. For investors in Canada, real estate is one of the best ways to build wealth, however we recommend exercise caution. With property prices trending down since 2022 due to higher interest rates, many pre-sale investors took a loss on their investment. It’s important to consider the risks associated with real estate investing. Aim for long-term goals and avoid “timing the market.” Understand your objective when investing in real estate and make sure your needs are being fulfilled.For those looking to renew or refinance their current mortgage, I recommend reaching out to a mortgage professional who can help find the best rate and solution for you. Generally, lenders do not offer their best options upfront, leaving you to do all the heavy lifting. A mortgage professional will take a holistic approach when looking at your mortgage and find solutions that work best for your situation. They will negotiate the terms and rate to ensure you are getting the best deal possible. For those renewing their current mortgage, you’re able to start this process as early as 120 days prior to your mortgage renewal date.