Posted by: Karim Ali
Coffee with Karim
What do rate cuts mean for mortgages?
As we approach the final months of 2024, the Bank of Canada (BoC) is signaling significant changes in its interest rate policy. With inflation showing new signs of easing, the central bank is expected to continue cutting rates to support economic growth. Here’s what you need to know about the upcoming rate announcements and how they could impact mortgage rates in Canada.
Expected Rate Cuts for 2024
Economists predict that the Bank of Canada will continue to lower its overnight target rate through the rest of 2024. Currently, the rate sits at 4.25%, but most analysts expect further cuts by the end of the year:
- October 2024: A 25-basis-point cut is expected, which would bring the overnight rate down to 4.00%. Some market analysts believe there’s a chance for a larger 50-basis-point cut, depending on economic data such as inflation and employment figures.
- December 2024: Another 25-basis-point cut is likely in December, potentially lowering the overnight rate to 3.75%.
New data from the Canadian Real Estate Association suggests that it’s most likely a total cut of 75 basis points will happen by the end of 2024, which would mean at least one of these announcements will present a 50-basis-point cut.
These cuts are part of the BoC’s efforts to stimulate the economy by reducing borrowing costs, especially in sectors like housing, which have been impacted by the higher interest rates of 2023.
What This Means for Mortgage Rates
The expected rate cuts have a direct impact on mortgage rates, both for current homeowners with variable-rate mortgages and for potential homebuyers. It’s important to note that current mortgage rate offerings already reflect the market’s expectations of future rate cuts. This means that unless the Bank of Canada makes larger-than-expected cuts, the actual impact on mortgage rates may be less dramatic than homeowners or potential buyers might hope for.
- Variable Mortgage Rates: Variable mortgage rates are closely tied to the BoC’s overnight target rate. As the central bank cuts rates, mortgage holders with variable-rate loans may see their rates decrease. By the end of 2024, variable mortgage rates could be lower, providing relief for homeowners who have been dealing with rising payments due to earlier rate hikes.
- Fixed Mortgage Rates: Fixed mortgage rates, particularly the popular 5-year fixed term, are influenced by government bond yields, which tend to fall as the BoC cuts rates. With bond yields expected to decline, 5-year fixed mortgage rates could also drop, creating more affordable options for those looking to secure a mortgage in late 2024 or early 2025.
The State of Inflation: Why the BoC Is Cutting Rates
As of September 2024, inflation in Canada is hovering around 2.5%, which is still above the BoC’s 2% target but much lower than the inflation rates seen in 2022 and early 2023. While inflation is moderating, certain pressures—like high housing costs—continue to affect overall price stability. With lowering interest rates and thus mortgage payments, however, it’s likely we keep seeing inflation subside.
With inflation showing signs of stabilizing, the BoC is focusing on ensuring that its monetary policy does not overly constrain economic growth. As a result, these rate cuts are aimed at balancing inflation control with the need to stimulate economic activity.
What Should Homebuyers and Mortgage Holders Expect?
For potential homebuyers, the upcoming rate cuts present an opportunity to secure a mortgage at a lower rate. As variable and fixed mortgage rates decrease, affordability may improve, particularly for first-time buyers who were priced out of the market due to higher borrowing costs in 2023.
The BoC’s interest rate cuts are happening slightly faster than anticipated earlier in the year, which could encourage buyers to return to the market more quickly. As borrowing becomes cheaper, demand for homes is expected to increase. However, the extent to which home prices rise will depend on local market conditions, particularly the availability of housing supply in Ottawa. In a market with limited supply, this increased demand could lead to higher home prices. Conversely, in areas with ample supply, the impact on prices may be more modest. It’s also important to note that the effects of rate cuts on the housing market can take time to materialize.
For those with variable-rate mortgages, the outlook is positive, with lower monthly payments likely as rates decrease. If you’re considering a refinance or renewal in late 2024 or early 2025, it might be a good idea to keep an eye on these rate announcements to secure the best possible terms.
Conclusion: A More Affordable Mortgage Market Ahead
As we approach the end of 2024, the Bank of Canada’s rate cuts are set to bring relief to mortgage holders and homebuyers alike. With rates expected to fall through the year, this could signal a more affordable housing market in 2025. Stay in touch with us to stay informed on upcoming BoC announcements and consider how these changes could benefit your mortgage plans.
Bonus tips
1
For Buyers
Consider a variable mortgage rate. It’s one of the only times in recent years where it may make sense to take one! I know current fixed rates are enticing, but consider where interest rates are predicted to go over the coming 2-3 years.
2
For Homeowners
When your mortgage is up for renewal, don’t just settle for the first rate you’re offered by your current lender. Take the time to shop around and compare rates from multiple lenders. Even a small difference in the interest rate can save you thousands over the life of your mortgage. You may also consider working with a mortgage broker who can help you find the best rate across several lenders.
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