The Bank of Canada lowered its key interest rate on Wednesday. Caryn Lieberman looks at how this could impact borrowing and house hunting.
The Bank of Canada’s recent interest rate reduction, the first in over four years, is expected to have a "psychological" effect on Canada’s housing market, although it may not significantly enhance affordability, experts say.
The rate cut lowered the Bank of Canada's key policy rate, which influences rates on loans like mortgages, by 25 basis points to 4.75 percent.
James Laird, co-CEO of Ratehub.ca, noted the significance of this move, considering it marks the entry into a declining rate environment, a change from the absence of rate cuts since the early days of the pandemic.
Changes in the Bank of Canada’s benchmark rate affect the rates Canadians pay on mortgages, with the big six Canadian banks adjusting their prime rates accordingly after the rate cut.
While prospective buyers may see a slight improvement in affordability, especially those previously deterred by higher interest rates, the impact of a single 25-basis-point rate cut is expected to be marginal, according to Laird. However, homeowners with variable-rate mortgages are likely to experience immediate relief, with their monthly payments decreasing, allowing for more payments towards principal rather than interest.
On the other hand, those with fixed-rate mortgages may not see immediate changes, as rates change at renewal. The rate on fixed mortgages is indirectly tied to the Bank of Canada’s policy rate through the bond market, with lenders typically being slower to adjust falling bond yields into their mortgage rates.
The Bank of Canada's move provides clarity for buyers, signaling a shift towards rate decreases rather than increases, offering certainty and confidence in future rates.
Although the rate cut may not directly stimulate new buyers, it could have a psychological impact on the market, influencing buyer sentiment positively amid a period of subdued activity.
