What the New, Sharp Rate Cut Means for Mortgages

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The Bank of Canada's latest moves to cut interest rates could spur a pickup in buyer activity in the real estate market, experts note, though some buyers may still be waiting for the year's final rate decision.

On October 23, the Bank of Canada decided to cut its key interest rate by a full 0.50%, bringing it down to 3.75 percent.

The larger-than-usual cut (a standard move is typically 0.25%) came in response to the latest inflation data, with the central bank stating that its focus has shifted from bringing inflation down to keeping it within its target range of 1 to 3%.

This marks the fourth consecutive rate cut from the central bank since June.

Despite such a substantial single cut to the key interest rate, well-known Canadian economist David Rosenberg notes that the Bank of Canada should keep cutting, by 50 basis points (0.50%) at each of its upcoming meetings, in order to bring supply and demand back into balance in the Canadian economy.

In an interview with Bloomberg, Rosenberg, founder and president of Rosenberg Research and Associates Inc., said that even after four consecutive cuts to its overnight rate, the Bank of Canada's rate remains "absolutely" restrictive and elevated.

"Inflation has come down 220 basis points (2.20%) over the past year, while the key policy rate has only come down 125 (1.25%), so do the math yourself," he said.

Rosenberg noted that, by the Bank of Canada's own estimates, the overnight rate still sits roughly 100 basis points (1.00%) above neutral, the hypothetical rate level that keeps the economy at full employment while holding inflation at the Bank's desired pace.

The central bank currently estimates its neutral rate to fall somewhere between 2.25% and 3.25%.

In Rosenberg's view, the Bank's key rate shouldn't just fall within that neutral range, it should actually drop below it.

The Canadian economy, according to the Bank's own monetary policy report, remains in a state of excess supply, and therefore needs stimulative rates to boost demand, he said.

"I think a steady diet of 50-basis-point (0.50%) cuts over the next several meetings should become the norm," stressed the leading Canadian economist and commentator.

As for the real estate market, Phil Soper, President and CEO of Royal LePage, notes that activity in Canada's housing market has remained "sluggish" in many regions recently due to elevated borrowing costs, "but October's more aggressive rate cut could quickly change that picture."

"With each rate cut, we expect more homebuyers to enter the game.

In turn, rising demand will drive home prices up faster, which will erode the benefit of lower borrowing costs," he stressed.

Soper added that following a cut of this size, "the spring market could arrive earlier than expected."

The question now is whether this will be enough to quickly "shift the conditions currently shaping the housing market."

While it will likely draw some buyers into the market and could push more sellers to list in anticipation of those buyers, it's quite possible many will wait for the year's final rate announcement on December 11 before making a move.

No one can predict with any real precision what will happen in the market, and buyers, even less so, can calculate the perfect moment to buy.

The combination of a 0.50% rate cut and upcoming changes to mortgage rules in December creates a genuinely favourable moment for buyers to make their move.

As a reminder, starting December 15, the federal government will allow 30-year insured mortgages for all first-time homebuyers and for all buyers of new-construction homes.

Under Canadian law, mortgages must be insured whenever the down payment is less than 20% of the property's value.

First-time buyers can now get 30-year amortization on insured mortgages, lowering their payments and improving their ability to qualify, whether buying new construction or a resale home (through MLS, for instance).

All other buyers can take advantage of 30-year amortization specifically when buying a new home from a builder.

The government is also raising the price cap for insured mortgages to $1.5 million, a substantial increase from the current $1 million limit.

This is a genuinely significant improvement to the rules, and it means buyers can bid on more expensive homes even with a down payment under 20% (8-10%, for example), while still obtaining mortgage insurance.

With plenty of available inventory, current market conditions are exceptionally favourable for prospective homebuyers.

Buyers waiting for rates and home prices to fall even further may, on the other hand, end up waiting right into a much hotter housing market.

Once rates fall to a level most buyers find comfortable, the housing market will heat up quickly, and prices will rise.

Prospective buyers should consider buying now if they're able to, and consider a variable-rate mortgage as a way to get into the market.

Alana Riley, Head of Mortgage, Insurance, and Banking at IG Wealth Management, believes further cuts from the Bank of Canada are still ahead in late 2024 and into 2025.

Any significant uptick in sales activity or home prices will likely serve as a signal to buyers that they need to act quickly.

We could see the market undergo a "psychological shift in the coming weeks."

"But once the market starts moving, it will likely heat up quickly, pushing home prices higher.

"This could lead to an unseasonably active winter and a busy spring season in 2025," she said.

"We also expect these rate cuts to help cushion the shock for homeowners facing higher rates as their mortgages come up for renewal," said Alana Riley.

"Shelter cost inflation remains elevated, driven by rent and mortgage interest costs, and continues to be the largest contributor to overall inflation in household budgets."

Lower mortgage costs are great news for homeowners with a mortgage renewal coming up over the next 12 to 24 months.

While rates will still be higher than what people locked in 3 to 5 years ago, the increase in payments will likely be more manageable than it would have been at the start of this rate-cutting cycle.

Immediately following the Bank of Canada's October 23 cut, the major banks also lowered their Prime rates by 0.50% to 5.95%, a change already reflected in variable-rate mortgages and lines of credit.

Those with variable-rate mortgages have started receiving notices of lower mortgage payments, or a revised split between interest and principal within their fixed variable-rate mortgage payment.

With Prime now lower, homeowners with a variable-rate mortgage and fixed payments will see a larger share of their payment go toward paying down principal.

For those with variable mortgage payments or a HELOC (home equity line of credit), the payment will drop starting with the next payment period.

For example, for every $100,000 outstanding on a variable-rate mortgage, the monthly payment will drop by roughly $28-30. For every $100,000 on a HELOC, interest savings will come to roughly $42 a month. That said, for fixed-rate mortgages, October's cut to the Bank of Canada's key rate likely won't bring an immediate reduction, since these rates are tied to government bond yields instead.

The Bank of Canada's next, and final, meeting of the year is scheduled for December 11.