In a promising shift for Canadian households, the Bank of Canada made multiple interest rate cuts in 2024, offering a glimmer of hope for easing borrowing costs.
As borrowing costs drop, the effects could ripple through the economy, bringing a breath of fresh air to consumers navigating the pressures of everyday expenses.
However, what does the central bank’s interest rate really mean for you? How does it affect mortgages and home buying? Continue reading to find out more.
What is the Bank of Canada policy rate?
The Bank of Canada’s policy rate, also called the overnight lending rate, sets the baseline for how banks and financial institutions determine the interest rates on various financial products, including mortgages and loans.
Following its latest cut during their scheduled meeting on Wednesday, September 4, the central bank’s rate currently stands at 4.25%.
Bank of Canada interest rate timeline
The interest rate has undergone many changes in recent years. In the post-COVID phase, interest rates steadied. But between March 2022 and June 2024, they rose at a breathtaking pace, from 0.50% to 5%.
On June 4, 2024, the Bank of Canada finally cut its lending rate for the first time in two years, citing cooling inflation. This has been followed up by consecutive rate cuts, the latest of which marks the first time since the global financial crisis in 2009 (barring the pandemic) that the bank has lowered interest rates three times in a row.
What does the Bank of Canada latest interest rate cut mean?
The immediate effect of the rate cut would be a reduction in Canadian borrowing costs, making it slightly cheaper to take out loans.
However, the implications of the rate cuts can vary depending on the type of loan you’re considering, your current stage in the mortgage process, or if you’re a first-time homebuyer.
Here are some of the potential impacts:
What does the interest rate cut mean for a fixed-rate mortgage?
When interest rates are reduced, existing fixed-rate mortgages remain unaffected directly, as the interest rate on these loans is set for a certain duration. However, there are some indirect impacts, such as:
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- Refinancing opportunities: Homeowners with fixed-rate mortgages can seek to refinance if current interest rates are lower than their existing rate. By refinancing, you can obtain a new loan at a reduced interest, potentially lowering your monthly payments and decreasing the total interest paid over the loan’s term.
- Lower borrowing costs: If you have a fixed-rate mortgage, the interest rate on that mortgage remains the same regardless of market rate changes. However, if you’re a homeowner looking to take out additional financing for things like home renovations, a lower interest rate environment means that new loans or credit lines you take out will have lower interest rates, reducing your borrowing costs.
- Consolidating high-interest loans: A lower interest rate can also make it more affordable if you’re a homeowner looking to consolidate high-interest loans. For instance, if you’re consolidating credit card debt into a new home equity loan, the lower rate means you’ll pay less interest over the life of the new loan.Alpine Credits offers home equity loans that are easy to get and can help consolidate multiple debts and spare funds for a home-repair project. To get approved, you simply need to own a home.
- Effect on new mortgages: For those looking to purchase a home or obtain a new mortgage, a reduction in interest rates means you can secure a lower fixed rate. This potentially makes new home loans more affordable for prospective buyers.
So, while the interest rate cut doesn’t alter the terms of an existing fixed-rate mortgage, it can influence the decisions of both current homeowners and prospective buyers in the housing market.
How does the rate cut affect a variable-rate mortgage?
On the other hand, some variable-rate mortgages are directly affected by changes in interest rates. Here’s how an interest rate cut impacts them:
- Lower monthly payments: For adjustable-rate mortgages, a type of variable-rate mortgage, the interest rate adjusts periodically based on market conditions. When interest rates decrease, the rate on an adjustable-rate mortgage also drops, leading to lower monthly payments.
- Reduced total interest costs: As the interest rate on a variable-rate mortgage decreases, the total interest paid over the life of the loan can also decrease.
- Adjustment periods: The frequency of rate adjustments depends on the specific terms of the mortgage. Even with the interest rate cuts now, you might only see changes in your payments at the end of the adjustment period, which could be quarterly, annually, or at another specified interval.
Variable interest rates are commonly found in mortgages, credit cards, and home equity lines of credit (HELOCs). According to the Financial Post, quoting an expert from Rates.ca, for every 0.25% decrease in the BoC policy rate, homeowners with variable-rate mortgages can expect their monthly payments to drop by roughly $15 for every $100,000 of their mortgage.
What does the interest rate cut mean for first-time homebuyers?
Buying your first home is a significant milestone and likely your largest financial commitment, so there’s no one-size-fits-all answer. It’s advisable to consult with a mortgage specialist to evaluate whether now is the right time for you.
Having said that, an interest rate cut can have positive effects for first-time homebuyers, such as:
- Lower monthly payments: With reduced interest rates, borrowing costs decrease. This means that first-time homebuyers can secure a mortgage with a lower interest rate than a year ago.
- Increased buying power: Lower interest rates can increase buyers’ purchasing power. Since borrowing costs are lower, first-time buyers may be able to afford a larger mortgage than they could have at higher interest rates.
- More favorable loan terms: First-time buyers might find better loan terms and conditions in a low-interest-rate environment. Lenders may offer more attractive mortgage products or incentives to attract new homeowners.
Overall, an interest rate cut generally benefits first-time homebuyers. However, you should also be aware of potential market changes, such as rising home prices due to increased demand.
While Canada’s housing market has remained largely unaffected by the previous rate cuts in 2024, it remains to be seen if lower reductions will bring an uptick in housing activity immediately, especially in major urban centers like Toronto and Vancouver.
Will homeowners with upcoming mortgage renewals benefit?
Almost half of all Canadian mortgages will be up for renewal within the next two years. Many of these were initially taken out when rates were much lower — back in 2022, the Bank of Canada’s policy rate was just 0.5%, and mortgage rates were below 2%.
If you took advantage of the low mortgage rates early in the pandemic, especially with a fixed-rate mortgage, the rates might still be nowhere near those levels when your loan comes up for renewal.
With current mortgage rates, you should expect your monthly payments to increase and be prepared accordingly.
When is the Bank of Canada’s next interest rate announcement?
The Bank of Canada’s next interest rate announcement is scheduled for October 23, 2024. This is the second-last meeting of 2024, with the central bank’s final event set to take place in December.
Will there be further interest rate cuts by the BoC?
During his prepared remarks on Wednesday, Bank of Canada governor Tiff Macklem said if inflation continues to ease as expected, it is “reasonable” to expect more rate cuts this year.
Analysts are also expecting further rate cuts, with some saying there could be as much as a 0.50% cut by the end of the year.
It’s essential to base your mortgage and homebuying decisions on your individual financial situation and short-term and long-term goals.
Secure your first, second, or third mortgage with Alpine Credits
Alpine Credits is here to assist you with your financing needs. With interest rates on the decline, now could be the time to consolidate bills and high interest credit cards to save money on interest. Unlike banks, our approvals are based on the equity you have in your home, not your age, income, or credit history.
The more equity you’ve built, the more you can access to invest in your goals. Applying for a home equity loan is straightforward and involves just three steps:
- Apply online — you can quickly complete your application with Alpine Credits. There is no need to provide your credit score or income history; just the value of your home equity is required.
- Get approved — homeowners with at least 25% equity get approved. You’ll receive a response faster than banks, often within a few days.
- Use the funds freely — once approved, you can use the funds for various purposes, such as debt consolidation or personal expenses.
If you have questions, contact a Financial Solutions Specialist at Alpine Credits for a free, no-obligation quote. They can assist you with the application process and answer any questions.
Frequently asked questions
What does it mean when the Bank of Canada lowers the policy rate?
The Bank of Canada lowers the policy rate to enable financial institutions to reduce interest rates on loans and mortgages. This, in turn, can help stimulate economic activity.
How much will the Bank of Canada cut interest rates in 2024?
The BoC has two more meetings this year, and financial experts think there could be at least another rate cut announcement in 2024.
What will an interest rate cut do?
When interest rates are lowered, borrowing money becomes cheaper. This is good for consumers as it usually means lower interest rates on mortgages, car loans, and credit cards.