Bank of Canada Interest Rate Reduction & Prediction!?
The Bank of Canada recently delivered a 25 basis point interest rate cut, which prompted major banks to lower Canada’s benchmark prime rate to 6.70%. This adjustment narrows the gap between the leading variable rates and the lowest fixed rates to just 86 basis points, down from over 150 basis points in March. This is good news for the first time home buyers.
In the last 24 hours, I have submitted six pre-approvals, fixed-rate mortgages in the 4% range.
For variable-rate borrowers, this rate cut translates to a savings of approximately $15 to $21 per month per $100,000 borrowed. This varies based on factors such as the loan type (new or existing) and whether it’s a mortgage or an interest-only home equity line of credit.
Despite this positive change, the Bank of Canada’s monetary easing has not significantly increased purchasing power for the average borrower. The key issue is that borrowers who need the lowest rates to pass the government’s mortgage stress test tend to avoid variable mortgages.
To secure the most competitive nationally advertised conventional variable interest rate of 5.85%, borrowers must prove they can afford a 7.85% interest rate. Consequently, those with high debt-to-income ratios prefer the more affordable fixed rates, which allow qualification at nearly 100 basis points lower than variable rates.
Although the Bank of Canada has cut rates by 50 basis points over the past 50 days, 5-year bond yields—which influence fixed mortgage rates—have only decreased by half that amount. Thus, the cuts are gradually enhancing homebuyer purchasing power.
The positive outlook is that markets are likely to continue pricing in lower central bank policy rates, assuming no new inflation concerns arise. This trend should help bring down both bond yields and fixed mortgage rates.
There’s Just Enough Bad News.
Typically, I avoid making predictions without detailed analysis. However, based on current data, I predict further rate reductions in the next three Bank of Canada announcements. Key indicators to watch include unemployment figures, inflation rates, and any statements from the Bank of Canada suggesting the need for economic growth. If you need a detailed breakdown, feel free to email me for a more comprehensive discussion.
Advantage: First Time Home Buyers – 30 Year Amortizations!
In recent years, the landscape of mortgage options in Canada has shifted significantly with the resurgence of 30-year mortgage amortizations. This change follows a major policy update by the Federal Government, effective August 1, 2024, designed to support first-time homebuyers. Under the new policy, buyers of newly constructed homes can now obtain mortgages with a 30-year amortization period, even if their down payment is less than 20%. Previously, such extended terms were only available to those with down payments of 20% or more, also known as uninsured conventional mortgages.
Here are the guidelines that must be met to qualify:
- This new qualification policy takes effect on August 1, 2024.
- Newly Constructed Home: The property being purchased must be a newly constructed home, meaning it has not been previously occupied for residential purposes. This requirement does not exclude newly constructed condominiums with an interim occupancy period.
- The property’s purchase price, including HST, must be below $1 million, in accordance with existing high ratio/insured mortgage qualification guidelines in Canada.
- At least one borrower on the mortgage application must be a first-time homebuyer. To qualify as an eligible first-time homebuyer, as defined by the Government of Canada, the borrower must meet one of the following criteria:
- The borrower has never purchased a home before.
- In the last four years, the borrower has not occupied a home as a principal residence that they or their current spouse or common-law partner owned.
- The borrower has recently experienced the breakdown of a marriage or common-law partnership. In this case, the regulations followed by the Canada Revenue Agency regarding the Home Buyers’ Plan apply.
- These eligibility criteria do not apply if the borrowers make a down payment of 20% or more. Under current mortgage qualification rules, a 30-year mortgage can be obtained regardless of the previously mentioned conditions.
Buying your first home, renewing your mortgage, upgrading or downsizing, connect with Mathew at Matt@HuronMortgages.com to look at all your options.
Mathew Monks, Mortgage Agent Level 2
Licence #M18002043
Mortgage Intelligence FSRA
Licence #10428