The Bank of Canada has just cut its overnight interest rate by 0.25% as of June 5, 2024. This move was widely expected, with over an 80% likelihood of it happening. This is the first rate cut in a long time, following six consecutive rate holds.
No Change: Your monthly payment stays the same, but more goes towards the principal rather than interest.
Line of Credit Holders:
Lower Interest: You'll pay less interest overall, giving you a bit more financial breathing room.
Mortgage Qualification: What's Changing?
Even though rates dropped by 0.25%, this doesn't mean you'll qualify for more money. Here’s why:
Stress Test Remains: The qualification rate, or stress test, hasn't changed. So, if you were looking to get a mortgage at a 4% fixed rate, you’d still qualify for the same amount now as before.
Variable Rate Mortgages: Slight improvement in your borrowing capacity, with an increase of about 2-3%.
Why Did This Happen?
Breaking the Cycle
This rate cut breaks a cycle of six straight rate holds. Amid pressure and diverging from the U.S. Federal Reserve, Canada is the first major economy to reduce rates recently.
Economic Indicators
Low GDP Growth: Canada’s economic growth is sluggish.
Dropping Inflation: Inflation fell to 2.7% in April, with a big part of it tied to high mortgage interest and shelter costs.
Immediate Impact on Real Estate
Buyer and Seller Psychology
Increased Activity: Buyers and sellers who were waiting for this rate cut are likely to jump back into the market. Expect more competition, if not long-term, then at least temporarily.
Mortgage Choices
Variable vs. Fixed Rates: With rates dropping, more people might lean towards variable rate mortgages. Short-term fixed rates (1-2 years) could also see reductions, making them more attractive.
What Should You Do?
Mortgage Renewals
Don’t Rush: If you have a mortgage renewal coming up, avoid rushing into an early renewal. Talk to a mortgage advisor first to explore your options.
Investor Sentiment
Increased Activity: Investors might start re-entering the market, seeing this rate cut as a signal to buy or hold onto their real estate.
Potential Delays
With the increase in mortgage applications, expect longer turnaround times from lenders. They may not be adequately staffed to handle a sudden surge in volume.
Remember, while this rate cut may not have a huge direct impact on your wallet, the psychological boost to the market is significant. Always consider the broader implications of any rate change and consult with a financial advisor for personalized advice.
.jpg)
