It’s the first interest rate cut since March by the Bank of Canada. They’ve cut their policy rate by 0.25 percentage points each time. This change would have major implications for the mortgage market overall, and in particular the long-running discussion of fixed versus variable rate mortgages. Penelope Graham, a mortgage expert at Ratehub.ca, highlights that if lenders pass on the full cut, the lowest variable rates for a five-year term may decrease from 3.95 percent to 3.70 percent, while the lowest fixed rate currently stands at 3.94 percent.
The central bank’s decision comes amid a troubling economic outlook, exacerbated by a weak jobs report released on September 5. This report has pushed bond yields down, down, down – the key ingredient in setting fixed mortgage rates. Graham notes that the decision reflects the governing council’s assessment of a “weaker economy and less upside risk to inflation,” as stated by Bank of Canada Governor Tiff Macklem.
The estimates of savings from the interest rate reduction are astounding. If you’re a homeowner with an average home price of $624,277, you would see savings of roughly $84/month. This savings is attributable to a drop in variable interest rates. This expanded financial relief will push some homebuyers to choose variable-rate mortgages.
Graham notes that the current 24 basis points spread between variable and fixed rates is pretty noteworthy. He points out that’s not actually huge. She argues this difference might force buyers to reconsider their mortgage choices given new developments. She indicates that signals of additional cuts in the future will play a crucial role in shaping market reactions.
“If their commentary is quite dovish, then we could see yields fall further, and then we’ll start to see some additional fixed rate cuts.” – Penelope Graham
CIBC analysts expect one more quarter-point cut this fall, as economist Andrew Grantham predicted that would occur in October. This excitement reflects trends that are playing out in the U.S. The central bank there recently lowered its key interest rate a quarter point and indicated further cuts are likely before the end of the year.
Graham calls attention to a developing storyline for fixed rate lovers. He says that further cuts are indeed likely this fall. She cautions against complacency.
“We’ve got plenty of precedents that show that variable rates can trend back up just as quickly as they drop, if not faster, and we still have a lot of headwinds that could put the boil under inflation.” – Penelope Graham
