Posted by: Karim Ali
Coffee with Karim
What do rate cuts mean for costs of ownership? A real example.
Thinking about buying a home in Ottawa? The recent interest rate cut by the Bank of Canada has made variable mortgage rates a hot topic. They’re coming down! And buyers want in. In this post, we’ll explore how these changes impact the cost of ownership for our team’s condo for sale at 20 Daly Ave, using real numbers to show the difference. More buyers are now opting for variable-rate mortgages, knowing that these rates are expected to drop below today’s fixed rates in the next 1-2 years.
Understanding Variable Mortgage Rates
Variable mortgage rates are closely tied to the Bank of Canada’s interest rate. When the BoC cuts rates, variable mortgage rates typically follow suit, leading to lower monthly payments for homeowners. Recently, the BoC made a significant rate cut of 0.25% to their overnight lending rate, in turn reducing some of the top variable mortgage rates from 6.50% to 6.25%.
Comparing Monthly Costs
Let’s break down the numbers for our condo for sale at 20 Daly Avenue, Unit 1810, priced at $589,000. We’ll compare the monthly costs of ownership with a 6.50% interest rate versus a 6.25% interest rate, assuming a 20% down payment.
Before the Rate Cut (6.50% Variable Rate):
- Monthly Mortgage Payment: $3,181.58
- Property Taxes: $529.24
- Condo Fees: $840
- Utilities: $76
- Total Monthly Costs: $4,626.81
After the Rate Cut (6.25% Variable Rate):
- Monthly Mortgage Payment: $3,108.36
- Property Taxes: $529.24
- Condo Fees: $840
- Utilities: $76
- Total Monthly Costs: $4,553.60
Cost Difference:
The recent rate cut results in a monthly cost difference of approximately $73.21. While this might not seem like a lot, over a year, this saves you around $878.52, which can be significant for many homeowners.
Why Buyers are Opting for Variable Rates
Many buyers are now choosing variable-rate mortgages over fixed rates. Some mortgage brokers report that over half of their clients are opting for variable rates. Here’s why:
- Future Rate Cuts: With variable rates expected to continue dropping, monthly payments could decrease further, potentially dropping below current fixed rates in the next 1-2 years.
- Flexibility: Variable-rate mortgages often come with more flexible terms, such as lower penalties for early repayment or switching lenders.
Market Trends
The trend towards variable rates is expected to grow as more buyers recognize the potential savings. In a market where affordability is a key concern, even small monthly savings can make a big difference. Additionally, with the expectation of further rate cuts, the gap between fixed and variable rates might widen, making variable rates even more attractive.
What does a 4% Variable Rate Future Look Like?
The general market expectation is for the Bank of Canada to lower their policy rate to approximately 2% by sometime in 2025 or 2026. This means variable rates would likely be in the range of 3.5% – 4.5%; historically, the spread between the BoC’s rate and variable mortgage rates has ranged from 1.5% to 2.5%.
With a 4.00% Interest Rate, the monthly costs of ownership of 20 Daly Ave #1810 would amount to:
- Monthly Mortgage Payment: $2,487.17
- Property Taxes: $529.24
- Condo Fees: $840
- Utilities: $76
- Total Monthly Costs: $3,932.40
To Wrap Up
The recent Bank of Canada rate cut has made a noticeable impact on the cost of ownership for those with variable-rate mortgages. For the condo at 20 Daly Avenue, the rate cut translates to monthly savings of over $70. With more buyers opting for variable rates, it’s clear that the potential for future savings is a significant factor.
For Potential Buyers:
If you’re considering buying a home in Ottawa, now might be a good time to explore variable-rate mortgages. With rates expected to decrease further, the savings could be substantial.
For Current Homeowners:
If you have a fixed-rate mortgage, it might be worth discussing with your lender the possibility of switching to a variable rate, especially if further rate cuts are expected.
Bonus tips
1
Stay Informed
Keep an eye on announcements from the Bank of Canada and trends in mortgage rates. Being informed can help you make better financial decisions.
2
Consult a Mortgage Broker
A mortgage broker can provide personalized advice based on your financial situation and help you choose the best mortgage option.
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