On March 12th, the Bank of Canada decreased the interest rate by 25 basis points to 2.75%. This marks the seventh consecutive rate cut from the Bank of Canada since last summer. So what does this rate cut mean for potential and current homeowners and their mortgage rate?
Impact on Mortgage Rates
The Bank of Canada’s interest rate is a pivotal factor in influencing mortgage rates by determining the cost of borrowing for financial institutions.
even more directly impacts rates when it comes to mortgages. Fluctuations in this rate affect the prime rate, which banks use to set their mortgage rates. And if you have a variable rate on your mortgage, the payments can fluctuate consistently throughout your loan term with every interest rate shift. A fixed rate mortgage will not change with every adjustment by the Bank of Canada, but rather at your point of renewal.
The Bank of Canada’s overnight lending rate plays a crucial role in determining the cost of borrowing for financial institutions and directly impacts mortgage rates in the country. Here’s how it works and what it means for mortgages:
Fixed Mortgage Rate
For an existing homeowner, your fixed rate mortgage will not be affected by the rate change from the Bank of Canada. These shifts only influence a fixed rate mortgage if you’re buying in the near future. Locking in during a lower a period of interest means your mortgage term could be a more favourable monthly cost. The hope is that when it comes time to renew your mortgage, commonly every 3 to 5 years, the rates have not increased drastically.
Variable Mortgage Rate
Existing homeowners will see an impact on their mortgage payment throughout their loan term with a variable rate. This can be both negative or positive, depending on the direction of the shift. When the rate increases, you will be required to increase your payment as well. If the rate decreases you will often have the choice to decrease your payment as well, or maintain at the current amount and contribute more to your principle loan amount with every payment.
Variable rate mortgages pose a higher risk to the homeowner, but the initial terms can often be more favourable. Some lenders will offer terms such as prime rate, minus 1% on a variable mortgage. But it’s important to weigh the initial benefit against the possible fluctuations throughout your loan term.
Inflation and the Housing Market
The Bank of Canada continually evaluates the interest rate in an effort to control inflation and work towards economic stability. Higher rates may create a lower demand in the housing market and potentially drive home prices down. Alternatively, lower mortgage rates may stimulate housing market demand and increase activity in homebuying.
Mortgage Lending in Canada
Days before the seventh consecutive rate decrease, Rocket Mortgage announced they are pulling their operations from Canada. Rocket is a prominent mortgage lender in the US but has decided to close their lending business in Canada. The announcement assured that they will see their current clients through the remainder of their current loan term, but will wind down all other operations by June 2025. With Rocket’s closure, where do current homeowners turn?
The six largest banks in Canada collectively control over 90% of the country’s loans and deposits and provide an array of different mortgages products.
- Royal Bank of Canada (RBC)
- Toronto-Dominion Bank (TD)
- Bank of Montreal (BMO)
- Canadian Imperial Bank of Commerce (CIBC)
- Bank of Nova Scotia (Scotiabank)
- National Bank of Canada
Alternatively to the bank, Canadians continue to see a few options in the mortgage market. These include companies such as First National Financial Corporation and Equitable Bank. A digital mortgage lender such as Nesto, trust companies like Manulife or a government agency like Canada Mortgage and Housing Corporation (CMHC). There remain to be many other options for mortgages for Canadian homeowners and those looking for new solutions with Rocket’s closure.
Buying a Home in Canada
With the continued positive updates from the Bank of Canada, it may be a good time to explore what’s available to you in a mortgage rate. Whether you’re facing a renewal or looking to purchase a new home, we always recommend speaking with a certified mortgage broker. They will be able to work with you directly and find the best rate based on your current situation. In the meantime, you can review our blog on what you need to get approved for a mortgage so you know if you’re ready to get started.
