Bank of Canada Makes Supersize 50bps Cut

Great news for homeowners and prospective buyers!
Last Wednesday, the Bank of Canada announced a significant .50% cut to the overnight target rate, dropping it from 4.5% to 3.75%. This move promises to reshape the landscape for variable rate mortgage holders, potential purchasers, and those approaching mortgage renewals in 2025. The overnight target rate aka the policy interest rate, key interest rate, or target rate directly affects prime lending rates across the country. The rate cut brought the large banks prime rate to 5.95% (other than TD who has a 0.15% higher Prime mortgage rate of 6.1%).

What does this mean for you?

Variable Rate Holders
There are two different types of variable mortgages in Canada; variable rate mortgage and adjustable rate mortgage.
If you’re a variable rate mortgage holder you have a fixed payment, even after this cut your payment will stay the same but a larger portion of your payment will go to your principal now.
ie. you just bought a home in September with a 30 year, uninsured mortgage of $500,000 at 5.89% (prime -.56%).
Before this week, your payment of $2962.48 was split: $508 to principal and $2454 to interest.
After the .5% cut your payment stays the same but $717 now goes to your principal and $2246 will go to interest. Effectively this cut alone shortened your amortization from 30 years to 26 years and 5 months. 

Some banks may let you adjust your payment when the BoC makes cuts so that you are paying the minimum payment for your original 30 year amortization. TD is one of those banks but it’s worth asking your bank as well.

If you are on an adjustable rate mortgage, your mortgage payment will decrease with each cut in order to keep your amortization the same. In the above scenario, your payment would lower from $2962.48 (with $508 going to your principal) to $2804.53 (with $559 now going to your principal).

Fixed Rate Holders
Your payment will not change for the length of your term unless you; break your term or are offered an early renewal by your Bank. It may be worth it to break your term but that’s a conversation for you and your broker to crunch the numbers between interest payment difference over the term and the penalty charged.

Potential Purchasers
Going fixed: Bank of Canada’s cuts do not directly affect fixed rates and the market rates you see today have already priced in many of the forecasted cuts. Fixed rates are tied to the Government of Canada bond yields and have actually seen an increase since their most recent lows in mid-September.
If you are set on fixed rates, make sure to get a rate hold and work with a broker or mortgage specialist that you trust will be updating your rate hold as the market moves.

Going Variable: Your buying power just jumped significantly by increasing mortgage amount 4.5-5% and with more cuts in the forecast, your buying power will continue to rise. This is obviously positive but remember that you are not unique, as your buying power increases, so does everyone else’s. As does their motivation to return to the market.

Should I Buy Now or Wait?

Since every borrower is different, this decision needs to be based on your personal situation BUT if you are ready now (can qualify at today’s rates, down payment is liquid, ready to move) do not simply wait for more cuts or Spring like everyone else… Currently many markets are seeing 10 year highs in inventory meaning more motivated sellers, less competition and more options for buyers. Not to mention that most buyers tend to take the end of the year off. Get in touch with your Realtor and your bank/broker- Active buyers are often rewarded in November/December. 

If you are planning on going with a fixed rate; talk to your broker about the forecasted fixed rates next year and do the math. Discuss with your Realtor whether that difference will be worth waiting to shop in a Spring/Summer 2025’s Seller’s market vs. the end of 2024’s Buyer’s market. Some buyers or folks renewing have even decided to go with variable to start and lock into a fixed rate next year (make sure you are aware of your chosen lender’s policies regarding this strategy)..

If you are planning on going variable; discuss variable rate vs adjustable rate mortgage options with your broker.  If you can afford today’s payments, you will be riding the rates down and paying off your mortgage quicker with each rate cut. If you would rather have the smaller payments and can find an adjustable rate mortgage (or work with a bank that will adjust it manually) then buying now puts you in the same position as those buying in 2025 rates wise, except you have the benefit of buying in a completely different market!

If making a move is in your future, let’s sit down now and create a strategy now.

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