Is the Bank of Canada Moving Fast Enough with Rate Drops?

A Third Consecutive Rate Drop: What You Need to Know

On September 4th, the Bank of Canada cut the overnight rate by 0.25%, marking the third consecutive rate drop since July 2024. This is a significant shift, but for many Canadians, it’s not happening fast enough.

Key Impact:

• Variable Rate Mortgage Holders: Expect to see a drop in your payments, with an estimated reduction of $15 per $100,000 for those with adjustable payment mortgages.
• Line of Credit Holders: The decrease in rates also offers some relief, though many are still hoping for faster reductions.

The Slowdown in the U.S. Economy

A key part of Canada’s rate decisions comes from what’s happening in the U.S. The latest job report shows that job openings in the U.S. fell to 7.6 million, the lowest since January 2021. With fewer jobs available, there are signals that the U.S. economy is weakening. And what happens in the U.S. inevitably impacts Canada.

"When the U.S. slows down, Canada follows suit. This is crucial for understanding where rates and the economy are heading."

Why Isn't the Rate Drop Faster?

Though inflation has dropped to 2.5%, housing and service costs are still high. While the Bank of Canada is trying to prevent a quick rebound in inflation, they’re also aware of the pressures on Canadians. The big question: Should rates drop faster, or are we walking a fine line to avoid economic disaster?

What's Next for Interest Rates?

Many economists predict that we could see further rate cuts by the end of the year, with a potential 50 basis point drop in October and another 25 basis point reduction in December. However, much depends on upcoming job data and global economic trends.

What Does This Mean for You?

Whether you're in the housing market or holding onto a variable rate mortgage, understanding the next steps can help you plan for the future.

If You Have a Variable Rate Mortgage:

• Expect lower monthly payments, with further reductions likely by the end of the year.
• You'll pay more principal and less interest over time if you keep your payments the same.

If You Have a Fixed Rate Mortgage:

• If you increased your payments to deal with higher rates, you can now request a payment reduction.
• Fixed rates are almost 1% lower than variable rates right now, making them an attractive option for those seeking certainty.

Should You Go Fixed or Variable?

For new buyers, the big question remains: fixed or variable? Running an amortization simulation often shows that variable rates come out ahead in the long run, assuming the overnight rate drops to 2.5%, as most markets are predicting. However, with fixed rates almost 1% lower today, some buyers might prefer the certainty of locking in their payments now.

The Housing Market Outlook

Economists believe the housing market is near its bottom, with moderate growth expected for the rest of 2024. Entry and mid-level homes are seeing more activity, while high supply levels are creating opportunities for buyers to negotiate better deals. However, don’t expect a full rebound until mid-2025, especially if you're selling in harder-hit areas like the Toronto condo market.

Upcoming Key Dates to Watch

• Bank of Canada Meeting: October 23, 2024
  A potential 0.25% to 0.5% rate cut is expected.
• U.S. Federal Reserve Meeting: September 18, 2024
  This is a critical one to watch as the U.S. economy affects Canada's rate movements.

What's the Bottom Line?

Rates are coming down, but not fast enough for many Canadians. While there’s relief for some homeowners and buyers, others will need to wait longer to feel the full impact. Whether you're planning to buy, refinance, or just curious about the market, the upcoming months are crucial. Stay informed and plan wisely based on your financial situation.