It’s official: Canadians can now access lower borrowing costs, following the central bank’s long-awaited interest rate cut on June 5.
That quarter-percentage-point cut, which brought the central bank’s benchmark overnight lending rate down to 4.75 per cent from 5 per cent, is the Bank of Canada’s first since the early days of March, 2020. It has made floating-rate borrowing products, including variable mortgages and home equity lines of credit, cheaper.
In the two weeks since that BoC rate cut, our brokerage team has fielded plenty of questions from clients who want to know exactly what it mean for their household’s bottom line – and when they’ll feel some rate relief kick in. Here are some answers to the questions today’s borrowers are asking.
Question 1: Will the Bank of Canada cut rates again?
When it comes to monetary policy, no one has a crystal ball. But what we do know is that the BoC’s governing council – the team that calls the shots on the benchmark rate – are heavily data-dependent. That means we can look to the latest economic numbers on inflation, gross domestic product and jobs, as clues to the BoC’s next move.
In particular, the central bank is focused on bringing Canada’s inflation rate back to its 2-per-cent target. Any further progress on this front – for example, if the May inflation reading comes in below April’s 2.7 per cent – will help pave the way for additional rate cuts.
Canada’s largest lenders, as well as market analysts, currently believe we’re on track for a total of four rate cuts in 2024, which, if doled out in quarter-point increments, will lower the benchmark rate to 4 per cent. However, as Bank of Montreal chief economist Doug Porter wrote in an economic bulletin, while it’s “reasonable” to expect more rate decreases, decisions will be made on a case-by-case basis.
“This is indeed likely to be the first of a series of cuts, although that series is not going to be a straight line down by any means,” he wrote in the report. “The bank’s tone is a bit more dovish than expected, but each and every cut this year will require evidence that inflation is calming.”
Question 2: When will my rate change? Has it already?
The borrowers most affected by the Bank of Canada’s rate direction are those with variable mortgages, which have interest rates that fluctuate based on the lender’s prime rate, which is in turn set by the BoC’s benchmark rate.
All lenders lowered their prime rate within a day of the BoC’s announcement, with most decreasing their rate to 6.95 per cent from 7.2 per cent.
So the short answer for this group is: yes, your rate has since changed, and will be reflected in your next payment after the announcement.
The way your payments may be affected, however, will differ based on the type of variable-mortgage you have. Those who have an adjustable-rate mortgage will see the actual size of their payment decrease at their next regular payment date. However, if you have the type of variable mortgage that comes with a fixed-payment schedule, your payment will remain the same; more of it will now go toward your principal mortgage balance, rather than interest costs.
Those locked into fixed mortgage rates will not see any change to their payments. However, given fixed mortgage rates have eased by roughly the same margin since the BoC’s rate cut, those shopping for a new fixed-rate mortgage or coming up for renewal may be able to access lower rates than they could have before the bank’s last announcement.
Question 3: Will the rate cut help me qualify for a mortgage?
Lower mortgage rates help borrowers qualify for a larger mortgage amount, and make it easier to pass the mortgage stress test, which requires borrowers to prove they could still afford their mortgage if their rate increased by two percentage points.
To illustrate, let’s take a look at a theoretical couple looking to purchase a home. Combined, they have a household income of $100,000, and have pulled together a 10 per cent down payment. With a mortgage rate of 6.95 per cent, these borrowers would qualify for a mortgage of $325,350. However, lowering their rate to 6.7 per cent would grant allow them to take out a mortgage as high as $331,920 – an increase of $7,300.
Ultimately, lower mortgage rates will provide a small benefit to borrowers of all kinds, whether they’re shopping around for a new mortgage, coming up for renewal or exploring their refinancing options.
James Laird is the co-founder of Ratehub.ca and president of CanWise Financial mortgage lender. Penelope Graham is the director of content at Ratehub.ca.
