The Bank of Canada Has Started a New Rate-Cutting Cycle!

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On Wednesday, September 17, the Bank of Canada finally cut its key interest rate by 25 basis points to 2.50%, after holding it steady all summer long.

In the middle of a busy fall real estate season, the question on everyone's mind is: is this announcement enough to breathe life into a market that's been struggling? Or is it just one of many factors prospective buyers are weighing? And what does it actually mean for borrowers who already have a mortgage or a line of credit?

Direct Impact on Borrowers:

People with a variable-rate mortgage or line of credit will feel the direct impact right away. Their rate drops by a quarter of a percentage point. For every $100,000 borrowed, a 0.25% cut works out to savings of roughly $12 a month on a mortgage, and about $20 a month on a line of credit.

Those with a fixed-rate mortgage won't see any change to their monthly payments. But anyone shopping around and considering fixed-rate offers may also find that rates have come down slightly. Fixed rates are shaped by bond yields, which have been trending downward over the past couple of weeks due to broader economic factors like unemployment and inflation.

Following the 0.25% cut to the key rate, experts say homeowners facing an upcoming mortgage renewal now have a real shot at savings.

Commercial banks set their own rates based on the central bank's key rate. According to the Bank of Canada's own research, 60% of all Canadian mortgages are coming up for renewal in 2025 and 2026.

Variable rates at many lenders have already come down and now sit meaningfully below 4%.

The Bank of Canada's rate cut could make variable-rate mortgages attractive again, but borrowers should keep the existing risks in mind.

Given how affordable they look right now, variable rates can seem especially tempting. But it's essential to remember that once the Bank of Canada finishes its cutting cycle, it will eventually have to start raising rates again.

If that level of risk doesn't sit well with you, consider a fixed rate instead. Fixed-rate mortgages aren't as flexible, but they're predictable, and they're already widely available below 4%.

Choosing between a fixed and variable mortgage at renewal should also depend on your housing plans.

If you're planning to move within the next few years, a variable-rate mortgage may make more sense, since the penalty for breaking it early is typically lower. That gives you more flexibility if you need to end the contract. But if your circumstances are unlikely to change, and you're confident about the next three to five years, locking in a fixed rate could be the better move.

We recommend starting your search for a new mortgage arrangement at least four months before your renewal date.

If your current rate sits around 5%, this might be a good time to break your existing mortgage contract and shop around for a lower rate. The closer you are to your renewal date when you break the contract, the smaller the penalty is likely to be.

Ironically, what ends up costing many Canadians the most at renewal is loyalty to their own bank.

When you renew with your current bank, they send you a renewal letter that essentially says: "Here's your new rate, just sign where indicated - quick and easy."

A recent survey by FICO found that 69% of Canadians end up staying with their current bank at renewal. Another survey found that three out of four Canadians remain loyal to the "Big Five" banks: RBC, TD, BMO, CIBC, and Scotiabank.

As a rule, the rate they offer isn't the most competitive one on the market, since every bank tends to save its best offers for attracting new customers.

If your mortgage renewal date is approaching, it's in your interest to at least explore what other banks are offering, by talking to a professional mortgage broker. In this segment of the market, the broker's services are paid for by the bank, so you'll not only save on interest, you won't spend a dime out of pocket for professional financial advice.

Impact on Affordability and the Housing Market:

Patrick Smith, Vice President of Lending at TD, said the rate cut will have a positive effect on affordability. "It's going to bring down payments for borrowers making a new purchase, coming up for a renewal, or planning to refinance for a purchase, a renovation, or something similar," he said. "It gives consumers a reason for optimism, and it may push some of them out of wait-and-see mode."

Mortgage rates under 4% should become the norm as interest rates keep falling, which should help many prospective buyers get past a psychological barrier and motivate them to enter the market.

While September's rate cut will only make home loans marginally cheaper, mortgage rates starting with a 3 are seen as a genuine psychological turning point for prospective buyers. "The Bank of Canada's latest decision means that practically everyone will start seeing a rate beginning with a 3," said Shaun Cathcart, senior economist at the Canadian Real Estate Association (CREA). "We've finally landed back in the range that a lot of people consider normal."

From the 2009 global recession up until the start of the pandemic in 2020, the average rate on the popular five-year mortgage sat in the 3% range, which, according to Cathcart, is more typical of the past decade compared to the rates above 4% we've seen in recent years.

A return to what buyers consider "normal" will likely be enough to draw them back into the market.

There's one more reason for optimism: the Bank doesn't usually cut rates just once, so there's a good chance we'll see another 0.25% cut at the next rate meeting on October 29.