Who receives the advantage of the reduced rate?
The Bank of Canada lowered its key interest rate from 2.75% to 2.5% on Wednesday, a move that is likely to have a moderate impact on the real estate market, but could have a notable effect if repeated in the future.
The cut in the key interest rate will translate into a drop in mortgage rates for future buyers with fixed-rate loans, but the effect will not be as direct as for variable-rate loans. Consumers with variable-rate mortgages, however, will immediately benefit from this 25 basis point cut.
For a variable-rate mortgage under the same conditions, the decrease in the monthly payment could be as much as $1,164. On the other hand, fixed-rate borrowers will not see an immediate effect on their payments due to the cut in the key interest rate.
Variable rates have increased significantly over the past period, rising from 1.76% to 7.04%. As of Wednesday, variable rates as low as 4% were available, according to Véronique Caron, while fixed rates as low as 3.99% were also on offer. Some buyers may have negotiated even lower rates in 2021, with some as low as 1.35%, according to Véronique Caron.
The trend of falling fixed mortgage rates has been underway for several weeks, but the effect on future buyers with fixed-rate loans is not as direct as for variable-rate loans. Alexandre Bélanger observes that the five-year fixed rate was popular in 2021, while the three-year fixed rate is particularly popular today.
Homeowners with variable-rate mortgages will see their mortgage payments decrease rapidly. A consumer who borrowed $400,000 over five years at a variable rate could save approximately $44 each month due to the cut in the key interest rate.
The context is reassuring for buyers and may support demand, according to some experts. However, there is not enough housing construction to meet demand, causing prices to rise. The increase in monthly payments for a $400,000 mortgage required to purchase a $500,000 single-family home with a 20% down payment and a 25-year amortized fixed-rate mortgage has jumped by $800 between February 1, 2021, and November 1, 2023.
The Bank of Canada's interest rate reduction aims to support economic growth amid trade uncertainties and a weakening labor market. Consumers who benefit from the reduction include borrowers such as homeowners with variable-rate mortgages, individuals with loans or credit that track the central bank rate, and businesses facing lower borrowing costs. Holders of personal loans, lines of credit, or car loans (which are often variable-rate) should also pay less interest on their loans.
Those who need to renegotiate their loan today can expect to pay several hundred dollars more per month for a $400,000 loan, according to Mr. Bélanger. Despite the moderately positive impact on the real estate market, the Bank of Canada's rate cut will make the cost of financing a bit more affordable, but prices are expected to continue to rise slightly in the coming months.
