Homeowners with variable-rate mortgages received welcome news as the Bank of Canada announced its third consecutive interest rate cut, bringing the key lending rate down to 4.25%. However, real estate experts caution that it may take some time before the lower borrowing costs translate into a significant boost in housing market activity.
“It’s good news that the Bank of Canada is continuing to lower the overnight rate, though we are not likely to see the effects in the housing market for quite some time,” said Victor Tran, a mortgage and real estate specialist at Ratesdotca. He explained that while rate cuts will reduce monthly payments for variable-rate mortgage holders, high home prices continue to limit buying power.
For every quarter-percentage-point decrease, homeowners with variable-rate mortgages can expect to save approximately $15 per $100,000 of mortgage debt in monthly payments. However, Tran pointed out that this reduction is not enough to significantly impact affordability given the current state of the housing market.
Fixed-rate mortgage holders, on the other hand, will not feel the effects of these rate cuts until their mortgage comes up for renewal.
“Even a full percentage point decrease in mortgage rates would not lead to a significant increase in buying power due to persistently high home prices,” Tran noted, adding that the affordability challenge remains a major barrier to increased housing demand.
Bank of Canada Governor Tiff Macklem indicated that more rate cuts could be on the horizon if inflation continues to decline. However, he warned that if inflationary pressures persist, the central bank may slow the pace of its rate-cutting efforts.
Canada’s inflation rate has remained below three percent in recent months, falling to 2.5% in July, providing some hope for further monetary easing.
Penelope Graham, a mortgage expert at Ratehub.ca, noted that previous rate cuts in June and July did little to stimulate real estate activity as prospective buyers continue to wait for more substantial decreases. “Many buyers are likely to remain on the sidelines longer, anticipating further rate cuts later this year,” Graham said.
With mortgage rates fluctuating regularly, Graham advised borrowers to shop around for the best rates. While variable mortgage rates may become more appealing as they continue to drop, Graham emphasized that the unpredictability of the Bank of Canada’s rate policies makes it essential for homebuyers to stay cautious.