Bank of Canada Announces Another Interest Rate Cut, Offering More Positive Signs for Homebuyers and Owners

In a move widely anticipated by financial experts, the Bank of Canada reduced its overnight policy rate by another 25 basis points, bringing the rate to 4.5%. The second straight rate cut is a positive signal for both homeowners and prospective buyers – but what does it really mean for you?

First-time homebuyers may gain some confidence

As we wrote last month, while 25 basis points doesn’t make for a material change for homebuyers, it does represent a positive trend that will surely give buyers greater confidence to enter the market. Lower rates mean affordability improves – and if rates continue their downward trajectory, these incremental decreases will add up to a meaningful difference for buyers.

After last month’s decrease, the Canadian Real Estate Association (CREA) reported that national home sales climbed, and the number of newly listed properties rose month-over-month in June. This second cut may spark more optimism among buyers and result in renewed life in the market – in other words, more homes may be listed, bought and sold.

Keep in mind, it appears that the Bank of Canada is lowering interest rates gradually – it is speculated that they don’t want rate cuts to spark a sharp rise in housing prices. If you’re eager to buy, it may be worth taking a similarly restrained approach. Here are some tips to consider:

• Lock in a mortgage rate with a lender. Some lenders, like RBC, let you lock into a rate for 120 days. So, if you believe you’re close to purchasing, locking in a rate can give you some peace of mind. If rates stay the same or go up, you keep the rate you’re locked in at. But if they go down, you could get access to a new lower rate.

• Choose a rate type and term that’s right for you. With interest rates in the news, there are lots of opinions about what type of mortgage Canadians should be choosing right now. The reality is, the best mortgage type is the one that’s right for you. Whether you choose a fixed rate or variable rate mortgage, a short term or a longer term, the decision is personal and can’t be found in a general opinion blog. It’s best to seek advice from a mortgage specialist, discuss your cashflow, lifestyle and plans for the future, and choose a mortgage accordingly.

• Exercise patience. It’s still a buyer’s market, which means as a buyer, you have more choice, time and leverage. Take the time to get your financing in order so you know what you can afford, find the right home for you at the right price, and be sure to do your due diligence with homes you’re interested in – this includes getting a home inspection to protect yourself from unexpected future expenses – before you close the deal.

Good news for variable rate mortgage holders

If you have a variable rate mortgage, the rate cut is good news, no matter how your mortgage is structured. If your mortgage payments automatically increase or decrease in harmony with mortgage rates, your regular mortgage payment may be going down. If your mortgage payments stay the same regardless of the current interest rate, you’ll see more of your regular payment applied to the principal of your mortgage – this means you could pay off your mortgage at a faster rate compared to a higher interest rate environment.

Renewers may still feel a rate “shock”

Nearly half of all Canadian mortgages are renewing in the next two years – and many of these mortgages were signed when rates were considerably lower (in 2022, the Bank of Canada’s policy rate was as low as 0.5% and mortgage rates around 2%). While the rate cut is welcome news, many renewers will still experience higher mortgage payments than they have today. If your mortgage is up for renewal within the next year, there are some things you can do now to help offset this higher interest rate environment:

• Don’t wait until the last minute to review your renewal options. While interest rates are expected to come down later in 2024, holding out to review your mortgage renewal options until the last minute can work against you. Rather, understanding your mortgage renewal situation today and speaking with your lender about your options sooner rather than later can help you prepare for your next mortgage.

• Make extra payments to reduce your mortgage balance. Does your mortgage offer options to pay it down faster? If you’re able to, accelerating your mortgage payment schedule, making a lump sum prepayment or doubling up on mortgage payments in advance of your renewal date, could help reduce your current mortgage balance. With a lower balance, you’ll be paying interest on a lower borrowed amount, thus reducing the impact of a higher rate.

• Look at ways you can cover off higher payments. Are you currently putting money aside for savings? Can they be redirected to cover off a higher mortgage payment? Are there any expenses you can cut back today to make room in your budget? Thinking about ways you can allocate more of your cashflow to your mortgage payment can help ensure you’re prepared when your new mortgage takes effect.

• Consolidate debt. In addition to your mortgage, if you’re servicing high-cost debt, consolidating it to a lower-rate solution could help bring down your debt payments and free up money for your mortgage.

• Understand your refinance options. Renewal is a good time to think about refinancing.  With a refinanced mortgage, you could potentially extend your amortization to reduce your regular payments and/or tap into your home equity to access funds for upcoming needs, such as a renovation.

What’s next for homebuyers and homeowners?

The next interest rate announcement is set for September 4, 2024. Instead of trying to predict what the Bank of Canada will announce, it is best to make mortgage decisions based on your personal financial situation, as well as your short-term and long-term plans. Now may be a good time to connect with your RBC Mortgage Specialist or Financial Planner to have a full financial review. Not only are they knowledgeable about the rate environment and housing market, but their expertise can help you make your next move with confidence.

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