TLDR
The Bank of Canada trimmed interest rates by 25 basis points to 4.75%.
The BoC’s policy rate (also known as a benchmark rate or overnight rate) guides a bank’s prime rate, which in turn affects the interest rates charged on financial products.
The rate cut is a positive sign for buyers and owners, but it’s not a game-changer.
The cut may be a signal for further decreases through 2024 and 2025.
For homeowners and prospective buyers in Canada, the interest rate cut is welcome news – but what does it really mean for you? Whether you’re looking to buy your first home, on track to renew this year or have a variable rate mortgage, the current interest rate environment matters. Here, we explore the impact of the interest rate cut on Canadians already in or about to enter the real estate market.
A positive signal for first-time homebuyers
Over the last two years, the Bank of Canada rapidly raised its policy rate from 0.25% in March 2022 through to 5% by July 2023 in an effort to cool inflation. This increase brought about higher prime rates and mortgage rates – and a bottom-line impact to many homeowners. Higher interest rates affected affordability and mortgage options, leaving many on the sidelines waiting for rates to cool.
With the recent interest rate announcement, the decrease is certainly a positive sign for new buyers who will start to see mortgage rates come down as a result. While 25 basis points won’t significantly change the game for homebuyers today, the decrease is widely considered to be the start of a trend of lowering rates – and as rates go down, so will mortgage-related costs.
Bottom line: The rate decrease won’t materially impact mortgage costs today, but the start of a downward trend may inspire new buyers to ramp up their home search efforts as confidence in the economy grows. If you’re looking to buy, you’ll likely see an improvement in housing affordability and options.
Some relief for variable rate mortgage holders
Variable rate mortgages work a couple of different ways, depending on the lender and structure of the mortgage. With some variable rate mortgages, as the prime rate goes up, mortgage payments automatically increase. With others, mortgage payments stay the same even in the face of a rate increase, but the mortgage amortization (the time period over which the mortgage is paid off) gets longer as less of the payment is applied to the principal of the mortgage.
With this rate decrease, the effect on your variable rate mortgage will depend on how your mortgage is structured. If your mortgage is such that your payments go up and down in response to your lender’s prime rate, your payments may automatically decrease. Otherwise, a lower rate will mean more of your money will go towards the principal amount of your mortgage.
Bottom line: If your lender’s prime rate decreases in response to the BoC’s interest rate cut, as a variable rate mortgage holder you will benefit in one of two ways: Either your regular mortgage payment will decrease, or more of your mortgage payment will be directed toward your mortgage principal, meaning you could pay off your mortgage faster than in a higher rate environment.
Mortgage renewers will still feel the financial impact of higher rates
Yes, the interest rate reduction is good news and a positive sign for Canadian homeowners. But if you took out a mortgage in 2022 or earlier, the Bank of Canada’s policy rate could have been as low as 0.5%, which would have meant a mortgage rate at or around 2%. With today’s policy rate more than 4% higher than the 2022 low, if you’re set to renew your fixed-rate mortgage in the coming months, your rate will be significantly higher than it has been.
As you approach your mortgage renewal, it’s important to understand what your new payments could be so you can budget accordingly. RBC’s Mortgage Payment Calculator can help you calculate your future payments using today’s rates. To get more details about your renewal options and rates, visit your local branch or reach out to an RBC advisor today.
Bottom line: While the interest rate reduction is positive news for homeowners, many mortgage holders renewing in the next 6-12 months will still feel the impact of higher rates compared to their current mortgage term.
Where do you go from here? It’s not a one-size-fits-all answer
Whether you’re buying, renewing or riding out your variable rate mortgage, what you do next depends on a number of factors, including your financial situation and your timeline for action. For advice that’s specific to your home financing budget, goals and needs, it’s a good idea to consult with a Mortgage Specialist who can provide expert guidance that considers your full financial picture.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsem*nt of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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