Another month, another Bank of Canada rate drop. Unless you missed it, the rates were cut by ¼% last week. This followed a rate reduction last month, adding to a drop of ½%. The impact of these two rate cuts will reduce a $100,000 variable rate mortgage by $28/month. This may not seem like a big change, however with the average mortgage in Canada in the $350,000 range, this would mean a drop in monthly payments of $100/month. What appears to be different with this rate drop is the narrative coming from the Bank of Canada.
In layman’s terms, the cause of rates increasing was to bring inflation down to around 2%. At its peak, inflation rose to 8.7% from a pandemic low of .37% in 2020. When borrowing rates are low, people start to spend money, much of it borrowed and when too many people are chasing products, the value of the products spike. (Think back to when a sheet of plywood was selling for $40 per piece in the spring of 2020, and 1 year later, that same plywood traded hands at $100.) The Bank of Canada increased rates to encourage people to stop buying. Alas, what this did was send the Real Estate market into a tailspin, with values slipping. At this point, the Bank of Canada was justifying high rates to calm the market.
The tone coming from the Bank of Canada has softened. Announcing the reduction in the lending rate, Tiff Macklem, the Governor of the Bank of Canada said this, “We are increasingly confident that the ingredients to bring inflation back to target are in place.” He went on to share, “If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate.”
With this new approach it appears we can look for more rate cuts in the future, with 3 more opportunities for the Bank of Canada to drop their lending rate.
The fine line of rate increases to calm a frantic economy is when they damage the market to an extent that people stop buying necessary items, businesses stop investing to grow and both groups simply “tread water,” waiting for things to get better. This would describe where Canada has been over the past 2 years, however with every rate drop we are seeing confidence return to the market. Last weekend we had several investors tour one of our homes for sale. Investors were one of the first group of Buyers that disappeared when the mortgage rates increased. The fact that they are back is a good indication that the economy is looking better as we move into the 3rd quarter.
The recommendation we are making to any people who have indicated that they wish to buy a home in the next few months is to get pre-qualified. Buy becoming pre-approved, this locks in today’s mortgage rate, typically for 90-120 days. In the event that the rates drop, you automatically get the lower rate. It costs nothing to obtain a pre-approval and you do not have to use it within that time period. This is a valuable tool for first time Buyers or for anyone looking to move up or down from their current home.
Another thought as the rates drop, is to review what you are paying for a loan. A colleague I work with was in a car accident in 2023 and had to purchase a new car. The car he owned had a 1% loan rate and the new rate on his current car was at 6%. As the rates decline a good strategy is to go to a bank and pay out the loan with one at a lower rate. Lower rates will greatly impact many people – anyone who had a credit card balance, a line of credit, loan or mortgage, however what it does is it causes people to spend again helping our economy become more robust, which in the end helps everyone.
Three ways to cut monthly payments as the Bank of Canada reduces their lending rates are:
- If you have a loan, consider approaching your lender or another one to pay the loan off with a loan with a lower interest rate. Another thought would be to renegotiate your loan extending the amortization that will cause the monthly payment to be reduced.
- If you are carrying a balance on a credit card, shop for a different credit card with a lower interest rate. Credit cards have a wide range of interest rates.
- If you have a mortgage renewing and have a line of credit or an outstanding loan, consider increasing your current mortgage to pay out the loan amount. By doing this, the payments on a mortgage will be far lower than if they are in a line of credit or a loan.
The good news, is that most economists feel that the rates will be dropping as we move toward the end of 2024, which in the end will lighten most peoples payments.
If you have any questions about mortgages or need to buy or sell a property I can be reached at lindsay@buyselllove.ca or 905-743-5555.
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