Rate reduction is "great for everyone", says top broker
The Bank of Canada cut interest rates for a second consecutive decision on Wednesday (July 24), a move that will have been greeted by a sigh of relief from many homeowners and prospective buyers alike.
The central bank’s decision means its benchmark rate has now fallen by 50 basis points since early June, easing pressure on variable-rate mortgage holders and home equity line of credit (HELOC) borrowers while improving affordability for some homebuyers.
The news is “great for everyone”, although it’s unlikely to see a big uptick in home sales for now, according to a prominent Toronto-based mortgage broker.
Victor Tran (pictured top), mortgage and real estate expert with RATESDOTCA, told Canadian Mortgage Professional that the cut probably wouldn’t cause a significant boost to the housing market – but an improving outlook for variable rates is coming into view.
The Bank of Canada’s flurry of interest rate hikes throughout 2022 and 2023 saw prime rates, which are directly tied to its overnight rate, surge in a development that caused the vast majority of borrowers to gravitate towards the stability of (often short-term) fixed rates.
Those options will remain the most popular choice for the moment, “mainly because fixed rates, of course, are still a lot lower than variable rates,” Tran said, “and everyone’s just looking for affordability and the lowest payment right now.
“But the spread between fixed and variable rates is definitely thinning, and if someone is to choose a variable-rate mortgage right now, I think that’s a good gamble.”
Chances are decent that the variable rate could drop below current fixed rates at some point next year, Tran added, meaning borrowers could see potential long-term gains if they’re willing to countenance higher payments in the near future. “That’s personally a risk that I would take if I was to purchase a home right now,” he said.
“If the spread between the fixed and variable is, let’s say, 50 or 75 basis points, that’s something I would really consider: just jump on the variable, grab a decent discount below prime, lock that in for five years and hopefully you’ll be ahead in maybe nine months or 12 months.”
That view is strengthened by growing conviction that further rate cuts are ahead from the Bank of Canada in the coming months, with the central bank having left the door wide open on Wednesday for rates to fall further.
What’s in store for the rest of 2024?
Inflation is trending in the right direction and the Bank registered some concern at Canada’s growing unemployment rate, signs that top economists believe indicate more rate drops are on the way.
If rates keep sliding for the rest of the year, all types of transactions could gradually increase, Tran said – whether purchases or refinances. With a well-publicized wave of mortgage renewals also underway, the prospect of a continual decline in rates would also be welcome.
That could give borrowers more flexibility and freedom when it comes to choosing a lender upon renewal. “It gives a lot of people options to shop around a little bit more and hopefully they can qualify based on the stress test rates to get a lower rate with a different lender,” Tran said.
“All transactions should gradually increase with these rate drops. Fixed rates are still hanging tight right now [although] bond yields have been sliding for the past few weeks now in anticipation of the Bank’s announcement.”
Banks turn to new tactic on fixed-rate offerings
On the fixed-rate front, Tran noted an increasingly common tactic employed especially by the country’s biggest banks: choosing not to announce or disclose their lowest rates, instead reviewing transactions on a case-by-case basis and often offering a lower rate based on what competitors are offering.
That’s a smart move, he added, “because then they don’t have to publish their lower rate offerings up front and they’re not obligated to offer that – they can still reserve to offer higher rates if needs be.”
Higher posted rates also allow those banks to charge higher interest rate differential (IRD) penalties, “because when they calculate IRD penalties, they look at your original rate that you signed for, excluding the discounts you received. So they always compare your original rate before your discounted rate.”
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