On June 5th, the Bank of Canada (BOC) announced a drop in its overnight target rate to 4.75%. This much-awaited decrease represents a 25-basis-point decline from the previous rate of 5%. While this rate drop was expected, what does it mean for homebuyers? Does this lower rate mean it’s a good time to buy a house right now? Will homebuyers on the sidelines be gearing up for a busy buying season? We dive into all of that and more below.
Key Takeaways
- Mortgage rates rise and fall along with the central bank’s overnight rate. However, the effect on fixed mortgage rates is not immediate
- With the recent interest rate cut, more homebuyers may be trying to enter the market, which can lead to more competition, bidding wars, and potentially higher home prices
- You can take advantage of the current rate cut by being financially prepared to buy a home, including having a down payment and securing a pre-approval for a mortgage
But first, some background on interest rates and how they affect the housing market. The June 5th rate reduction is the first interest rate cut from the BOC since March 2020. This cut signals a shift in the federal government’s monetary policy stance after they hiked rates aggressively in the early 2020s to combat rising inflation (here’s a primer on how that works). The rate hikes worked, and now that inflation has settled to 2.7% (which is within the BOC’s target 1% to 3% range), interest rate cuts may become part of the central bank’s toolset once again.
This interest rate hiking campaign in the early 2020s had a cooling effect on the Canadian housing market, turning many smaller Canadian markets from seller’s markets to balanced or even buyer’s markets. This rate drop could reverse this trend.
Why might the central bank’s rate reductions shift real estate markets in favour of sellers?
Simply put, federal interest rates influence mortgage rates, and lower mortgage rates might increase housing demand as potential homebuyers sidelined by high mortgage rates enter the market.
The BOC acknowledged this in its June interest rate announcement, stating that inflation could rise again if house prices in Canada increase faster than expected or if wage growth remains high relative to productivity.
How Do Interest Rate Cuts Affect My Mortgage Affordability?
The BOC’s interest rate cuts affect the Canadian housing market in two key ways:
Better Mortgage Affordability
First, as the central bank’s overnight rate drops, so do mortgage rates (although the effect is somewhat delayed). Lower mortgage rates mean homebuyers should see an increase in their mortgage affordability, as more of their payment goes to the principal, and less goes to interest.
Why are mortgage rates impacted? Because fixed-rate mortgages (the most common type of mortgage in Canada) are affected by the Government of Canada’s five-year bond yield. Despite recent rate cuts, current rates for fixed-rate mortgages have yet to reflect the change. Market demand for Government of Canada bonds influences the bond yield, and it does not always move in sync with the BOC’s overnight rate — including now.
More Homebuyers in the Market
A second way that policy interest rates impact the housing market is through the supply and demand of homes.
Better mortgage affordability typically means that more homes will fit into a homebuyer’s budget, which can increase the number of purchasers in the market. More homebuyers in the market without more homes for them to buy means they will compete for the available homes. This competition could result in multiple offers, bidding wars, the return of offers without conditions, and – yes – higher prices.
That said, Gowling WLF estimates that, in 2024 and 2025, 2.2 million Canadian households (over $675 billion worth of Canadian mortgages) will come up for renewal. Many of these homeowners will be renewing at much higher rates, and some of them may opt to sell their homes, which could increase the supply of homes for sale in many parts of the country.
Is It a Good Time to Buy a House Right Now?
So, is it a good time to buy a house right now? At the risk of taking the easy way out, it depends.
Right now, Canada’s real estate markets are in flux as they react to changes in mortgage rates. More Canadians may be entering the market, but so might more sellers for the reasons we mentioned above. Suppose you’re comfortable with this flux. In that case, there’s a higher likelihood that you’ll get a good deal on the property you’re hoping for in a market where distress is appearing among sellers.
As more homeowners approach renewal at higher interest rates, it is plausible that many will need to sell their homes because renewing at higher rates is unaffordable. This phenomenon is already happening in Toronto’s condo market. In June 2024, the market had more listings than ever before.
Typically, the best time of the year to buy a home is during the fall and winter months. Yes, there are fewer listings, but there are also fewer homebuyers willing to venture out in the colder weather to find a home, or they’re preoccupied with winter holidays.
To be more specific, late September to February is the prime time to buy a home due to less competition, which can give you more negotiating power as a homebuyer. In addition, depending on the sellers’ urgency, they can be more motivated to accept a lower offer, especially if their homes have been on the market for an extended period heading into the winter.
So, if you’re looking to buy a home in 2024, you must be prepared to put your best foot forward and outcompete homebuyers waiting to enter the market.
How to Take Advantage of Mortgage Rate Drops
While Canada’s real estate market is expected to be in flux over the summer as regions react to mortgage rate changes, the best time to prepare to buy a home is now. There are several steps you can take to set yourself up for homebuying success:
Secure Your Down Payment
The first thing you’ll need to consider is your downpayment.
Typically, the minimum downpayment in Canada for insured mortgages is:
- 5% for homes under $500,000,
- 5% on the first $500,000 plus 10% on the remaining amount for homes over $500,000 up to $999,999
- 20% payment on homes $1 million or more.
While having a larger downpayment has many benefits, especially when buying in a volatile housing market, having at least the minimum downpayment saved will allow you to qualify for a mortgage and take advantage of lower rates.
Optimize Your Credit Score and Debt Service Ratios
The next thing you’ll want to do is pay down debt and boost your credit score. These two factors are important items that mortgage lenders look at when issuing a mortgage pre-approval.
To maximize your credit score, try not to carry more than 35% of your available balance as debt, and ensure you make your payments on time every time.
Lenders will also use two important ratios when evaluating how much you can afford to borrow: gross debt service (GDS) and total debt service ratio (TDS). These two ratios should not be more than 39% and 44%, respectively.
Get Mortgage Pre-approval
Getting pre-approved or pre-qualified for a mortgage is an excellent step to take before seriously shopping for a home.
Mortgage pre-approval will give you a firm idea of your maximum home price and mortgage amount. This amount is based on your income, debts, and down payment. Lenders will also pull your credit report and review your financial documents during pre-qualification. In addition, you’ll receive a pre-qualification letter that shows sellers you are a serious, creditworthy homebuyer. Mortgage pre-approval also allows you to get a rate hold from lenders for 90-120 days while you shop for homes.
Is Now a Good Time to Buy A House in Canada?
The BOC’s recent decision to cut interest rates marks a significant shift in monetary policy, which aims to balance growing Canada’s economy and keeping inflation under control. This change is expected to impact housing prices, but the exact impact will depend on your location.
While the rate cut may increase housing demand by enhancing Canadians’ purchasing power, it also carries potential risks. Overall, it’s too soon to see the full impact of this rate cut.
For homebuyers wondering if now is a good time to buy a house, the current market presents both opportunities and challenges. With more homes coming onto the market as sellers list to avoid renewing at higher mortgage rates, homebuyers might find they hold the power, particularly in the upcoming fall and winter months. Canadians need to be financially prepared to make their move by saving an adequate down payment and obtaining pre-approved mortgages.
