September 2024 Interest Rate Announcement: 5 Questions Canadians Might Be Asking

The Bank of Canada delivered good news to Canadian borrowers for the third straight time, trimming interest rates again by 25 bps. The policy interest rate cut comes as the inflation rate in Canada fell to 2.5% in July, marking the slowest rise in consumer prices since March 2021.

Canadians are thinking about their next move

The cumulative impact of a 75 bps reduction over the last few months could be significant – the cut will likely pull more Canadian prospective buyers off the sidelines and may help ease some of the stress homeowners with upcoming mortgage renewals are feeling.

The announcement, combined with the current economic environment, is leading Canadians to ask themselves important questions about buying and owning a home, and how best to navigate their mortgage options. Here are answers to five key questions:

1. Given the recent interest rate announcement, should I choose a fixed or variable rate mortgage?

It is worth remembering that with a fixed rate mortgage, your regular payments stay the same for the length of your mortgage term. With a variable rate mortgage, while your payment stays the same throughout the term, the amount that is applied toward interest versus principal will fluctuate as prime rate fluctuates during that time.

Variable rate mortgages are getting a lot of attention these days, as more Canadians are considering the merits of a mortgage that lets you take advantage of falling rates. But it’s important to keep in mind that the rates on both fixed and variable rate mortgages are coming down. For instance, the rates on medium- and longer-term fixed rate mortgages (terms of three, four and five years) are (at time of writing) significantly lower than variable rate mortgage terms – even with the latest rate cut.

As you consider whether to choose a fixed or variable rate term, here are some things to think about:

• Your mortgage goals: How does your mortgage payment affect your cash flow? In other words, do you need to choose a mortgage today that offers the lowest possible payment? Or, is having the ability to pay your mortgage down faster more important to you?

• The merits (and features) of both mortgage types: Fixed rate mortgages offer you the stability and predictability of having your rate locked in for the entire time, while variable rate mortgages provide the opportunity to save money should rates fall during your term.

  Keep in mind, if rates fall during your variable rate mortgage term, your payments don’t go down – rather, more of your mortgage payment will be applied towards your principal, reducing your amortization and the interest paid over the life of the mortgage.

• The rate outlook: How do you feel about the current rate outlook and how do you think that might change in the coming months and years? Do you believe rates will continue to go down and if so, at what pace? And how comfortable are you should your assumptions be incorrect?

It’s worth using a mortgage payment calculator to test out different rate types and terms, using today’s published rates, to help answer this question for your personal situation.

2. If interest rates are expected to continue to fall, should I choose a shorter mortgage term?

A five-year mortgage rate has been a standard in Canada for some time, as homeowners like the stability that comes with locking in a rate for a whole five years. But with the higher interest rate environment of recent years, more homeowners have opted for three-year mortgages, hoping that a better deal will be available when that term is up.

In effect, these homeowners are trying to time the market, which has historically been difficult to do. It’s more important to make your choice based on your personal situation. For instance, when choosing a term, consider:

• How long you think you’ll be in your home. If work or life changes could mean a move in the near future, a shorter-term mortgage may be a better choice.

• Whether you can maintain your mortgage payments with your current and future expected cash flow. If you’re comfortable with your payments and your income is relatively secure, choosing a longer term may provide financial stability over more years.

Whatever your situation, it’s important to select a timeframe that works with your financial plans and goals. An RBC Mortgage Specialist can offer guidance – beyond your mortgage – that can help you make decisions that benefit your full financial picture.

3. What else should I consider when getting a mortgage, besides rate?

While interest rates are dominating headlines today, a mortgage is in fact more than just the rate – and having a mortgage that works for you can offer financial flexibility and security. Here are some features – beyond rate – that you’ll want to look at when choosing a mortgage:

• The ability to customize. Mortgages that offer the flexibility to pay down your balance sooner should you come into extra cash, skip or defer a payment when money is tight, can help you fit your mortgage around your life and changing financial needs.

• The pre-payment penalties. Should you need to break your mortgage in the future, some mortgages have steeper penalties than others. With any mortgage it’s worth looking at how pre-payment penalties are calculated and what they could look like if you need to get out of your mortgage before it matures.

• The opportunity to leverage your home equity. Some mortgages allow you to easily tap into the equity you have built in your home, which can be helpful should you have a major purchase or renovation planned or post-secondary school expenses.

• The flexibility to create multiple mortgage segments. Certain mortgages, like the RBC Homeline Plan, allow you to split your mortgage balance into multiple segments. For instance, you can allocate part of your balance to a three-year fixed rate mortgage and another part to a five-year variable rate mortgage. Creating multiple segments allows you to manage market rate risk.

• Advice on how your mortgage fits into your bigger financial picture. When you work with a professional who can provide guidance on more than your mortgage, you may discover solutions that let you better manage your overall finances.

• Incentives and offers. Be sure to ask your mortgage professional about any offers you may qualify for – they can add up to meaningful perks and savings.

4. I’m thinking of buying my first home. Is now a good time? Or should I wait for rates to drop further?

Buying your first home is a major milestone and likely your biggest financial commitment to date. So, there’s no cookie cutter answer here. It’s best to discuss your plans with a mortgage specialist to determine if the time is right for you.

There are some considerations worth thinking about. For instance, if you’re only waiting to purchase because of the interest rate environment, consider the impact of holding out – home prices could rise as more buyers enter the market and you could miss out on the perfect home by waiting on the sidelines. Timing the market is tricky and the decision to buy or not to buy should be based on your personal goals and financial situation.

5. Is switching my mortgage to another lender right now a good idea?

The decision to switch or stay depends on whether you’re getting what you need out of your mortgage provider. Are they offering the features outlined in Question 3, above? Do they provide bigger picture advice, or are they simply mortgage providers? If you’re thinking about switching, it’s important to make sure you’re comparing apples to apples – a lower rate with less flexibility, for instance, may not be your best option.

Another factor to consider is the cost to switch. Some mortgage providers will cover all or some of the associated costs so it’s worth investigating this.  And, while some providers offer enticing switching incentives, it’s important to again ensure that they also offer the mortgage options and features that are important to you. Keep in mind, if you secured a low rate a few years ago and you have some time before maturity, it may not be worth switching – the incentives may not offset the difference in rate. But if you are up for renewal, you may want to shop around to see if there are some savings to be had. Either way, it’s a good idea to speak with a mortgage specialist to help you assess your options.

The next interest rate announcement is set for October 23, 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 Advisor  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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