Is caution needed ahead of an expected BoC cut?
The Bank of Canada is widely expected to cut its policy rate this morning for the third consecutive time – but brokers, borrowers and hopeful buyers shouldn’t be too complacent about the prospect of a huge dive in mortgage rates in the months ahead, according to a top industry professional.
Paul Meredith (pictured top), of CityCan Financial, told Canadian Mortgage Professional that while falling rates were undoubtedly good news for the market, those closely watching for big drops should temper their expectations about a return to rock-bottom lows.
That’s especially the case, he said, for borrowers sitting on the fence and waiting to see how far rates will fall. “Something I’ve been telling clients regularly [is that] eventually, all these buyers are going to come back into the market,” he said. “There are some who do realize that the market will start taking off again as rates continue to fall – and I personally think that some people have unrealistic expectations on how much further the rates are going to go.
“I think there are some that [believe] rates are going to go back into the 2% range again, and some may even think that they’re going to go back into the 1% range again. And I tell people that barring another global financial or health crisis, it’s quite unlikely that we’re going to see that now.”
Why fixed rates won’t necessarily plunge in the months ahead
A further 25-basis-point cut by the central bank would bring its benchmark rate to 4.25%, down from its 23-year high of 5% at the beginning of the summer.
Fixed rates have also tumbled in each month thanks to a slide in five-year Government of Canada bond yields, although the likelihood of another big decline seems remote. “As I tell everybody, anything can happen in the financial world,” Meredith said. “There’s no guarantees.
“No-one has a crystal ball, and we don’t know where rates are going to go, so chances are strong that they’re going to continue to drop. But will they drop down to a number starting with two? While anything can happen, I would say it’s not likely.”
Janna Dawdy of JCMortgages notes an increase in sellers making concessions and growing confidence among first-time buyers, buoyed by lower interest rates and improved buying power.
— Canadian Mortgage Professional Magazine (@CMPmagazine) August 30, 2024
Read more: https://t.co/8CwJklhphx
A common misconception among borrowers, Meredith added, is that fixed rates are directly influenced by the Bank of Canada’s approach, rather than the bond market.
Education around that topic has been a focal point for brokers in recent times – but while rates almost certainly won’t hit the lows of the COVID-19 pandemic, that’s not to say activity won’t pick up in the coming months.
There’s a “very good chance” that rates could fall to a point by the end of the year that allows the market to gather pace, Meredith said. “Nobody knows for sure, but I think it’s possible that if we do start to see fixed rates that begin with three once again, then at that point we’re going to see people saying, ‘OK, now it’s time [to enter the market],” he said.
What’s the outlook for mortgage refinances and renewals?
While a surge in homebuying activity has failed to materialize despite the Bank of Canada’s rate cuts to date, refinancing is picking up. Many homeowners, according to Meredith, are prioritizing a lower payment over a lower rate and exploring options such as switching to a 30-year amortization to bring their monthly borrowing costs down.
For those whose main consideration is rates, “we go over the payment differences with them and if they’re comfortable with that, then we proceed with the lowest rate,” Meredith said. “But I have noticed not a huge influx of refinances, but more people looking to refinance.”
As for the glut of mortgages facing renewal in 2025 and 2026? That’s a trend that’s been flagged by the Bank of Canada and regulators alike as one that could pose a sizeable threat to the economy – but Meredith said borrowers on the whole appear prepared for what’s coming down the line.
“Very few” are not educated about the likelihood of facing a higher payment upon renewal, he said, while the recent swing towards rate cuts has also improved the outlook. “The worst time to renew would have been the fall of last year, when rates were above 6% for just about everything,” he explained.
“Now we’re back to pretty much everything starting with a four again, which is great news for everybody. We’ve already seen a substantial drop in rates.”
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