Frances Hinojosa, CEO and co-founder of Tribe Financial Group, notes that Canada's banks usually change their prime lending rates on the same day the Bank of Canada announces rate adjustments. (Photo by DAVE CHAN/AFP via Getty Images)
If you're a homeowner or someone hoping to buy a home, the Bank of Canada's decision to cut interest rates can bring either relief or a modest improvement to an already challenging situation. For those with variable-rate mortgages, a rate cut means slightly lower monthly payments. Prospective buyers may find it a bit easier to afford a home as mortgage rates decrease. However, homeowners who locked in extremely low mortgage rates during the pandemic will see a significant increase in payments when it’s time to renew, despite the rate cuts offering only a small cushion.
A substantial number of homeowners are in this situation. In its 2024 Financial Stability Report, the Bank of Canada pointed out that nearly half of all mortgage holders have yet to experience a sharp rise in interest rates. TD Bank’s chief economist, Beata Caranci, has warned that these homeowners could face "sticker shock" when their mortgage terms end and they are met with much higher rates. Many had enjoyed rates as low as 1.5% to 1.75%, but as they renew, they could be looking at rates as high as 4.5% for fixed mortgages or even more for variable ones, according to Jimmy Elamad, a mortgage expert at Y Mortgage, Mortgage Alliance.
Elamad also emphasized that this significant rise in interest rates will result in a major increase in mortgage payments. A recent Equifax report supports this, revealing that 15% of mortgage renewals in 2024 saw monthly payments rise by more than $300. In Ontario and British Columbia, the situation is even more dramatic, with about 20% of renewals facing the same steep increase.
For those with existing mortgages, any Bank of Canada rate cut typically leads to an immediate adjustment in prime lending rates by the banks. This means a small reduction in monthly payments for variable-rate mortgages. For example, a 25-basis-point cut on a $100,000 mortgage would reduce payments by about $15 per month. On a larger mortgage, say $600,000, this could save homeowners approximately $90 each month. Three cuts amounting to a 0.75% drop would bring savings close to $270 monthly.
Fixed-rate mortgages, however, are more closely tied to the bond market and don’t see immediate changes following a BoC cut. According to Frances Hinojosa, CEO and co-founder of Tribe Financial Group, fixed mortgage rates may only be affected once the bond market reacts to the rate cuts. It’s also possible that the bond market has already anticipated an interest rate reduction in September, meaning fixed rates might not change much unless further rate cuts are expected.
For those hoping to buy a home, the news isn’t all bad. A report from Ratehub.ca noted that housing affordability in Canada slightly improved in July due to the Bank of Canada's previous rate cuts. Even though further cuts could potentially spark more competition and drive home prices higher, the real estate market has remained relatively quiet so far. Hinojosa suggested that now is a favourable time for buyers, particularly first-timers. While home prices remain elevated, the slower market gives buyers more flexibility and time to carefully choose a property.
