So the news that every potential home buyer has been waiting to hear has finally arrived, the Bank of Canada has reduced their interest rate! While the rate reduction was only by .25%, this was the first time since 2022 the Bank of Canada has actually lowered the interest rate. Of course, lower interest rates on your mortgage are always a good thing, but how can it benefit you specifically? We will share some of the ways the Bank of Canada interest rate cut might benefit you, how you can plan to take full advantage of this cut as well as future ones, and what you need to look out for to keep your equity safe.
1. How will the Bank of Canada’s interest rate cut benefit you?
Lower interest rates mean that your mortgage payment will be lower and it also means that your pre-approval will go up. The simplified version of this is that the Bank of Canada interest rate reduction will be reflected in what consumer banks like RBC, CIBC, & TD will charge on mortgages. The reduction amounts to 5%, and below are a few examples of how that math works out.
Lower Mortgage Payment
Using RBC’s online mortgage calculator, inputting a mortgage amount of $800,000 results in a monthly mortgage payment of $4,716.81 at an interest rate of 5.14%. If we reduce the interest rate by .25% (4.89%), we get a monthly payment of $4,602.88, which is a savings of $113.93 per month.
Higher Pre-Approval
Assuming you were pre-approved for a mortgage of $800,000 and could facilitate the payment of $4,716.81 shown above, you would now be able to qualify for a mortgage of nearly $820,000. This is because the payment of $4,716.81 can now facilitate a mortgage of $819,800 at the lower 4.89% interest rate.
***The above rates in the RBC online calculator might not be the actual rate they are charging on a mortgage. Please speak to a mortgage professional directly as the posted rates are often higher than the actual rates they charge.
2. How to take full advantage of the Bank of Canada interest rate cut
As history has shown us, consumers tend to operate in a herd mentality, and that is clearly the case with real estate. The market has been dying to get some easing on interest rates for over two years, and now once they have it, some consumers will be saying “If I wait, rates might go even lower”.
Nobody has a crystal ball but I think it is fair to say that most economists and pundits believe we will continue to see progressive easing on interest rates over the coming years, however, there is no knowing how quickly that will happen. What is for certain, is that real estate prices in the GTA have always had a seesaw effect – lower interest rates mean higher real estate prices.
Where did the overwhelming amount of buyers go from 2022? Do you remember when there were 15+ offers for every listing that came on the market. If my math is correct, that means there are still a large number of buyers who are waiting to get into the market and if they come in swarms, we will see pricing shoot back up. Just look at what happened in 2023 when the Bank of Canada had two consecutive announcements where they did not increase interest rates….we saw a spike in sales activity and for a brief moment, multiple offers started becoming common again. So how can you maximize your benefit from the Bank of Canada rate cut? It’s quite simple….get ahead of the market.
a) Buy now before the interest rate cuts are reflected in listing/sale prices. There is plenty of inventory on the market that is priced well.
b) Don’t get greedy. Yes, rates can (and likely will) go down further. While you can look at it and think “If I wait, I will save even more money” what you really need to be concerned with is what your mortgage payment is. If rates go down, and prices rise, you are literally no better off.
c) Think Long-Term. Remember that your mortgage payment isn’t fixed for 25 years. While you might be paying a slightly higher interest rate by purchasing now, you will be able to benefit from lower interest rates when your mortgage renews….but you you don’t have to buy your house again at the current market prices so your payment would be considerably lower than someone who is purchasing in the current market.
3. How Can You Keep Your Equity Safe If You Purchase Now?
Every time I write one of these posts I can not help but think readers are saying “You’re a real-estate agent, you would make the case to buy a house in any market so you can make money”. Quite honestly, I would think the same, but regardless of the current market, I really only advise buyers to do something if I would personally do the same for my family and that means making sure our equity is safe.
If I was buying now, I would have concerns given the huge change in the real estate market since 2022 and I certainly would prefer to have lower interest rates. We are all familiar with the saying “You can’t have your cake and eat it too”, well when it comes to purchasing now it’s really like “You can have your cake…but you need to eat it later”. The fact is, there is plenty you can do right now to keep your equity safe, and also grow it.
a) Consider a shorter-term mortgage. While the rates might be higher than a 5 year mortgage. You would be able to renew sooner and benefit from any additional rate cuts.
b) Consider a blended mortgage. You can have a mortgage that is made up of both a fixed and variable rate. You might be taking a gamble on the variable side, but if you believe rates will go down, you will get the immediate benefit of that, and if rates go up, the increase would not impact the fixed mortgage component.
c) Consider breaking your existing mortgage for a new one. If rates go down and you want to take immediate advantage, you might consider breaking your current mortgage to get a new one at the lower rates. You can usually break your mortgage, but it can be quite costly, especially with fixed rate mortgages as banks typically use an interest rate differential calculator to determine your break fee. While that cost can be high, you will likely end up saving more money over the course of your new mortgage than if you stayed with the existing one.
Ultimately, you need to be comfortable in the financial decision you are making for you and your family. The Bank of Canada rate cut is a great start to making things a little easier for buyers, and further cuts will likely make things better…..until those rate cuts are reflected in higher home prices. What you have to determine is whether or not you will be someone following the herd, or having the foresight to get ahead of the market.
The Bank of Canada is scheduled to make their next rate announcement on July 24, 2024. If that announcement comes with another rate drop, I can assure you that it will be a catalyst that spurs a buyer frenzy for the summer and fall. If you think they will be lowering their rates, it would be wise to buy before this announcement and take advantage of the current home prices, while still getting the benefit of that rate drop before the closing of your home.
If you would like to learn more or have a private conversation about the best options for you and your family, contact us and we can arrange a buyer consultation to navigate the best route for you.