Dear Reader,
The Bank of Canada (BoC) announced this morning (September 4th) that it has lowered its overnight rate target to 4.25%. This represents a 0.25% decrease from the last meeting and a 0.75% drop from the peak of 5% reached in July 2023. The market still expects an additional 0.5% decrease this year. We are now at the same level as in spring 2023 when mortgage rates were lower. The next BoC meeting will take place on October 23, 2024.
The Fight Against Inflation is on Track
With this new decrease, the BoC continues to believe that the fight against inflation is going well and that higher interest rates are no longer necessary. The latest inflation reading stands at 2.5%, still down from the peak of 8.1% in 2022 and the 2.9% peak in 2024. Despite this year's 0.75% rate cut, the economy continues to grow modestly at 2.1%. Normally, a 2.1% growth is considered normal, but with a 3% population growth, this doesn't seem sufficient. In fact, we are now hearing about a “me-cession” or an individual recession, despite the fact that the country is not officially in recession. This is evident in the per capita GDP data, which continues to decline and now stands at $54,866.05 per person. The peak in Canada was $60,178 per person in the second quarter of 2022. This marks the fifth consecutive quarter of economic decline per capita in Canada. In essence, what this means is that people do not feel they are in a favourable economic environment, even though things seem to be going well collectively. The unemployment rate remains stable at 6.4%.
So, with an economy that is moving forward, but not as quickly as expected, interest rates will continue to fall. Fixed rates should decrease further, but more slowly than variable rates. The reason is that they started to drop eight months before the Bank of Canada’s cuts. Those who opt for variable rates should generally come out ahead. Of course, the choice between fixed vs. variable is more complex than just reading a blog, so I suggest you contact me to make an informed decision.
Impact on Real Estate
What this also means for real estate is that lower rates will make mortgage qualification easier and allow more buyers to enter the market. We are likely to have a very exciting spring next year. So, if you are planning to buy in the near future, I would start looking now.
Impact on Interest Rates
Because we have two types of mortgages, fixed and variable, they will be affected differently. Variable-rate mortgages, including lines of credit, are impacted today (for existing mortgages, see the next paragraph). All variable-rate mortgage rates are reduced by 0.25%. Today, the lowest variable mortgage rate is 5.45%. Fixed-rate mortgages are not directly affected by the BoC's decision. However, in the news, bond yields have started to drop. This means that in the near future, we could also see fixed rates drop.
Advice for Mortgage Holders and Seekers
If you have a variable-rate mortgage or a line of credit, whether HELOC or personal, you will notice a reduction in your payment of about $15 per $100,000 mortgage and $20 per $100,000 for the line of credit. So, if you have a $500,000 mortgage, your payment will decrease by $75 per month or $100 for the line of credit. If you have a variable-rate mortgage with a static payment, likely through TD if I arranged your mortgage, your payment will not change. This means you will start paying off your mortgage a little faster. If in the past you had increased your payment to cover at least the interest, I do not suggest going back to a lower payment. It is better to use the extra payment to increase your principal repayment and start paying off your mortgage. If you are struggling to make your payments, contact me to discuss the right strategy. All these changes will likely occur with your next month's payment. If you pay weekly or biweekly, you will see the change during the second set of payments (depending on the bank).
If you have a fixed-rate mortgage, nothing changes for you until your renewal. If you have a renewal in the next 12 months, you should start your process as early as possible, as you could be at risk of payment shock.
If you are looking for a mortgage, your pre-approval does not change, as you are more likely to have a pre-approval on a 3-year fixed rate rather than a variable rate. If rates start to drop, you will benefit from the lower rate.
If you are not yet pre-approved, I suggest starting your process now and not waiting for more news about interest rate cuts, as the market will likely pick up and prices will probably rise. You would have the chance to explore a market with more inventory and less competition than if you wait.
If you need help with a mortgage, pre-approval, or a plan for the future, you can contact me or Gina by making an appointment:
Sincerely,
Simon Bilodeau and Gina Lopez
Mortgage Brokers
DLC-Mortgage Negotiators
604-828-9864
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