The Bank of Canada’s Monetary Policy continues to shape the Canadian housing market, with its last rate cut on Dec 11, 2024 marking the 5th consecutive reduction in rates since June 2024. The overnight policy rate now stands at 3.25%, following two back-to-back ‘super-sized’ half percentage point rate cuts.
These aggressive moves highlight the central bank’s efforts to address changing economic realities and challenges, but what does this really mean for home buyers and owners? We will break down the key takeaways, predictions and real-world implications for variable and fixed rate mortgages
Dec 2024’s Interest Rate Cut: A Snapshot
On December 11, 2024, the Bank of Canada lowered its overnight rate target by 50 basis points (or 0.50%), bringing it down to 3.25%. This follows a similar half-point reduction back in October.
Why did the Central Bank aggressively cut interest rates as we closed out 2024?
Their dual mandate is to maintain price stability and support sustainable economic growth in Canada. With inflation stabilizing near its 2% target, the Bank of Canada needed to shift its focus toward stimulating economic activity.
Other key drivers impacting their decision include:
- Softening GDP growth: The economy grew by only 1% in Q3 2024, indicating weaker business investment.
- Rising unemployment: The unemployment rate has increased to 6.8%, suggesting the labor market is
- External risks: Potential U.S. tariffs and reduced immigration targets add uncertainty to Canada’s economic outlook.
Historically, such aggressive cuts are rare. However, the central bank’s recent actions underscore the seriousness of Canada’s current economic challenges.
Impact to Home Buyers and Homeowners
Rate cuts by the Bank of Canada often lead to lower variable mortgage and secured lines of credit interest rates.
For variable-rate mortgage holders with ‘variable’ or ‘fluctuating’ payments, the immediate impact is a financial gain to their cash flow and a reduction to their effective mortgage amortizations, since less payment is servicing interest costs.
Variable rate holders with ‘static’ or ‘fixed’ payments also benefit with more principal being paid off as Prime decreases, despite maintaining a predicable mortgage repayment.
Overtime, this can have a downward pressure on fixed rates, making them more competitive.
The following chart highlights the current average 5 yr fixed vs. 5 yr variable rate differences from leading mortgage lenders for insured (i.e. high-ratio – less than 20% down) and uninsured (i.e. conventional) mortgages
Source: MortgageLogic.news
Variable Rate Implications for Different Mortgage Holders & Seekers
For First-Time Buyers:
Lower rates mean reduced borrowing costs, making home ownership more affordable. With lower monthly payments, buyers may qualify for higher loan amounts, expanding their home-shopping options.
For Existing Variable-Rate Mortgage Holders:
After enduring rate hikes in previous years, variable-rate borrowers now have some relief. Lower rates translate to decreased monthly payments and improved cash flow.
For Homeowners Considering Refinancing:
This may be an opportune time to refinance at a lower rate. While breaking a fixed-rate mortgage comes with penalties, the potential savings from reduced interest costs could outweigh these fees.
For Investors and Move-up Buyers:
Cheaper borrowing costs may encourage homeowners to upgrade to larger properties or invest in rental real estate. With variable rates potentially becoming more affordable than fixed rates, this trend could gain momentum.
Key Consideration: As the lending landscape is shifting (en masse), towards variable rates once again, it is important to understand that future economic changes and uncertainty that continue to exist come with some risk and reduced certainty. Your comfort with this market uncertainty and/or financial ability to withstand immediate changes should guide your mortgage decision.
Reach out to determine which option best aligns with your financial goals. A mortgage professional can help you devise a suitable mortgage strategy
Fixed Rates Likely to Stay Stagnant
While variable rates are trending downward, fixed mortgage rates are expected to remain relatively stagnant. Bond market volatility, tempered by global uncertainties and threats on US tariffs, coupled with cautious U.S. Federal Reserve policies have kept fixed rates hovering around 4-4.5%.
Implications for Homeowners:
- Fixed rates have likely reached their floor – for now
- Individual lending institutional appetites to offer competitive rates may vary based on internal profit margins and landscape as more mortgage holders enter to market seeking better deals
- Maturing Fixed-Rate Mortgages: If your fixed-rate mortgage is up for renewal in 2025, it’s crucial to shop around, deals can be found likely from different mortgage lenders and institutions
- Prospective Fixed-Rate Borrowers: Consider shorter-term fixed-rate products to avoid locking in to long at today’s rates.
Takeaway: Fixed rates still offer stability and peace of mind. Locking in to a short-term may provide flexibility to take advantage of future rate changes with minimal costs. Borrowers with fixed-rate mortgages maturing in 2025 should compare renewal offers and consider working with a mortgage professional to secure the best rates, given recent stress-test and loan-to-income (LTI) policy changes
Projections for 2025: How Far Will the Bank of Canada Continue Cutting Rates?
Market analysts and economists predict the Bank of Canada (BoC) will continue cutting the overnight lending rate. However, there is consensus that the largest stimulating rate cuts are largely already behind us now; with future adjustments more measured in response to real-time economic data and incremental.
Currently the markets predicts the following rate changes at the BoC’s next policy announcement scheduled for Jan 29:
- 25 bps cut – 70% chance
- No change in rates – 30% chance
If a 25 bps rate cut does materialize, this would move the overnight target rate down to 3.00%. Resulting Bank Prime Lending rates (i.e. what our variable and other floating interest rates are priced off of), would be expected to move in lockstep to 5.20%.
The longer-term, 2025 year-end outlook include a gradual reduction in the overnight lending rate to 2.50 to 2.75% levels, as highlighted in the the chart below:
Make no mistake, if there are signs of an economic recovery, including a major resurgence in the housing market and house prices, the Bank of Canada will undoubtedly be forced to pause injecting further rate stimulus and hold rates for the foreseeable future.
Sources: Canadian Mortgage Trends, MortgageLogic.news
Practical Tips for Borrowers
- Compare Market Offerings: Lower rates means more competitive and savings. Using the services of a trusted mortgage professional to shop around and help you snag the best deal for your circumstances
- Build a Budget Buffer: Even with rates on the decline, build in a payment buffer or have some savings set aside should market conditions reverse
- Get pre-qualified and pre-approved: Whether you are house hunting or preparing for an upcoming mortgage renewal, get pre-qualified to understand your borrowing capacity. Lower rates and relaxed mortgage qualification changes will stimulate home buying and selling activity. The 2025 Spring housing market is expected to be competitive!
- Consider a Fixed Rate: If you prefer financial stability, a competitive short term two to four-year mortgage rate can help provide sufficient payment predictability while also positioning you to take advantage of potential lower rates in the future
- Stay Informed: Markets move quickly. Economic changes and policy decisions can influence the your available mortgage options and short/long-term mortgage strategies
- Consult with qualified professionals: Your independent mortgage professional, financial advisors and real estate agents/brokers can all offer valuable advice and market insights. A qualified mortgage professional can help you interpret the numbers and data to maximize your borrowing potential
Conclusion
The Bank of Canada’s rate cuts and easing mortgage rules create opportunities for Canadian home buyers and homeowners. While borrowing costs are decreasing, it’s essential to remain vigilant and adaptable.
By staying informed and seeking professional advice, you can make well-timed decisions that align with your financial goals. Whether you’re considering a variable-rate mortgage, refinancing, or exploring new purchase options, now is the time to take proactive steps in Canada’s evolving real estate market.
