{"id":23972,"date":"2024-08-02T15:05:41","date_gmt":"2024-08-02T19:05:41","guid":{"rendered":"https:\/\/www.zolo.ca\/blog\/?p=23972"},"modified":"2024-08-02T15:05:42","modified_gmt":"2024-08-02T19:05:42","slug":"mortgage-interest-rate-cuts","status":"publish","type":"post","link":"https:\/\/www.zolo.ca\/blog\/mortgage-interest-rate-cuts","title":{"rendered":"How the Interest Rate Cuts Affect Mortgages &#038; Homeowners"},"content":{"rendered":"\n\n\n<p>The Bank of Canada reduced its policy interest rates in June, and more rate reductions may be on the horizon this summer. What do interest rate cuts mean for mortgage holders and the Canadian housing market? First, we need to understand why rates are dropping.<\/p>\n\n\n\n<section class=\"bg-white border-t border-b border-blacklight my-12 md:my-16 sticky md:relative top-0 md:top-auto z-10 md:z-auto alignwide  wp-block-zolo-block-toc \" aria-hidden=\"true\"><div class=\"wrapper relative max-w-2xl mx-auto md:py-8 flex flex-col flex-shrink-0 max-h-screen md:max-h-none\"><input type=\"checkbox\" id=\"toc-toggle\" class=\"hidden\"\/><label for=\"toc-toggle\" class=\"flex justify-between cursor-pointer md:cursor-auto py-4\"><div class=\"toc-title leading-normal font-medium m-0\">In this article<\/div><svg class=\"w-6 h-6 fill-current text-blue md:hidden transition-transform duration-150 ease-in-out\" viewbox=\"0 0 24 24\"><path d=\"M22 12c0-5.5-4.5-10-10-10S2 6.5 2 12s4.5 10 10 10 10-4.5 10-10zM6.9 10.9l1.4-1.4 3.7 3.7 3.7-3.7 1.4 1.4L12 16l-5.1-5.1z\"><\/path><\/svg><\/label><nav id=\"toc-nav\" class=\"zolo-toc-nav max-h-0 md:max-h-full overflow-y-auto scrollbar-hidden overscroll-none\"><ul class=\"zolo-toc-list my-4\"><li><a class=\"entry-title no-underline hover:underline\" href=\"#why-the-bank-of-canada-reduced-its-policy-interest-rate\">Why the Bank of Canada Reduced Its Policy Interest Rate<\/a><\/li><li><a class=\"entry-title no-underline hover:underline\" href=\"#how-lower-policy-rates-translate-to-lower-mortgage-rates-for-canadians\">How Lower Policy Rates Translate to Lower Mortgage Rates for Canadians<\/a><\/li><li><a class=\"entry-title no-underline hover:underline\" href=\"#interest-rate-reductions-and-mortgage-renewals\">Interest Rate Reductions and Mortgage Renewals<\/a><\/li><li><a class=\"entry-title no-underline hover:underline\" href=\"#interest-rate-reductions-are-good-for-canadian-homebuyers\">Interest Rate Reductions Are Good for Canadian Homebuyers<\/a><\/li><li><a class=\"entry-title no-underline hover:underline\" href=\"#the-bottom-line-on-mortgage-interest-rate-cuts-in-canada\">The Bottom Line on Mortgage Interest Rate Cuts in Canada<\/a><\/li><\/ul><\/nav><\/div><\/section>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"why-the-bank-of-canada-reduced-its-policy-interest-rate\">Why the Bank of Canada Reduced Its Policy Interest Rate<\/h2>\n\n\n\n<p>In June 2024, the Bank of Canada (BOC) <a href=\"https:\/\/www.bankofcanada.ca\/2024\/06\/fad-press-release-2024-06-05\/\">reduced its policy interest rate<\/a> by 0.25 basis points. This brought the overnight rate down to 4.75% from 5%.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"962\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2024\/07\/156012-zolo_how-will-rate-cuts-impact-my-mortgage_Superside_V1_V1-1024x962.png\" alt=\"\" class=\"wp-image-23974\"\/><\/figure>\n\n\n\n<p>Several key factors influenced this decision. Firstly, inflation <a href=\"https:\/\/www.theglobeandmail.com\/topics\/inflation\/#:~:text=Canada's%20inflation%20slowed%20to%202.7,highest%20in%20nearly%20four%20decades.\">has been decreasing<\/a>, with the Consumer Price Index (CPI) inflation dropping to 2.7% in April 2024.<\/p>\n\n\n\n<p>The BOC&#8217;s <a href=\"https:\/\/www.bankofcanada.ca\/rates\/indicators\/key-variables\/key-inflation-indicators-and-the-target-range\/\">preferred measures of core inflation<\/a> also showed a downward trend, increasing confidence that inflation would move towards the federal bank\u2019s target of 2%. From a global perspective, slower-than-expected growth in the United States also suggests an upcoming economic slowdown.<\/p>\n\n\n\n<p>Given the evidence of easing inflation and the need to support economic growth, the BOC&#8217;s Governing Council concluded that monetary policy no longer needed to be as restrictive. This led to the decision to cut the policy interest rate to provide financial relief and stimulate Canada\u2019s economy.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how-lower-policy-rates-translate-to-lower-mortgage-rates-for-canadians\">How Lower Policy Rates Translate to Lower Mortgage Rates for Canadians<\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"855\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2024\/02\/bigstock-Main-Entrance-Of-Residential-H-253436872-1024x855.jpg\" alt=\"\" class=\"wp-image-23369\"\/><\/figure>\n\n\n\n<p>After the BOC dropped their policy interest rate in June, there was significant <a href=\"https:\/\/ca.finance.yahoo.com\/news\/what-a-bank-of-canada-rate-cut-on-wednesday-could-mean-for-your-mortgage-110034309.html?guccounter=1&amp;guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&amp;guce_referrer_sig=AQAAAKoFadhxsKqfLDW06DUnkF6z3ovETsWZX_-6VqG1R_6792Yp1pV1GLW0WrO1pTxt9d7NJmo2696eckEGg63I-FoW5nLxYYSakQHieuElnjDrDcqFbIuNrzayZBgsCrsPz4PKs5s7WA6eqJA0E9rHdFCafbhepilrgrWNhtVqhRtC#:~:text=The%20BoC's%20benchmark%20interest%20rate,rate%20to%204.5%20per%20cent.\">news coverage <\/a>about the effect of this move on Canada\u2019s mortgage rates. Unfortunately, while the BOC\u2019s policy interest rate does have some effect on mortgage rates, the impact is not immediate or a 1:1 direct correlation. What does this mean? <strong>Rates might drop, but how quickly and how much is not an exact science.<\/strong><\/p>\n\n\n\n<p>It\u2019s been weeks since the BOC\u2019s policy interest rate dropped, and Canada\u2019s mortgage landscape has seen some minor adjustments. While variable-rate mortgages fluctuate with the BOC&#8217;s policy rate, fixed-rate mortgages are more closely tied to the Canadian 5-year bond yield.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">How Variable-Rate Mortgage Rates Will Change<\/h3>\n\n\n\n<p>When the BOC changes its policy rate, the interest rates on <a href=\"https:\/\/www.zolo.ca\/blog\/variable-rate-mortgage\">variable-rate mortgages<\/a> adjust accordingly. If the BOC raises its policy rate, the interest rates on variable-rate mortgages will increase, leading to higher monthly payments for borrowers. Conversely, if the policy rate is lowered like in June, the interest rates on these mortgages decrease, resulting in lower monthly payments.<\/p>\n\n\n\n<section class=\"wp-block-zolo-related flex items-center py-6 leading-tight border-t border-b border-blacklight undefined\"><p class=\"font-serif pr-6 md:pr-12 mr-6 md:flex-shrink-0 border-r border-blacklight\">Related content<\/p><p class=\"related-link w-full my-0\"><a href=\"https:\/\/www.zolo.ca\/blog\/how-to-negotiate-mortgage-rates-canada\">How to Negotiate Mortgage Rates<\/a><\/p><\/section>\n\n\n\n<p><strong>For every 25-basis-point decrease, variable-rate mortgage holders can expect to pay $15 less per $100,000 of mortgage. <\/strong>Adjustable-rate mortgage holders will see immediate reductions in their payments. Additionally, those with variable rates will have more of their payments applied to the principal, reducing the amount owed more quickly.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">How Fixed-Rate Mortgages Will Change<\/h3>\n\n\n\n<p>On the other hand, <a href=\"https:\/\/www.zolo.ca\/blog\/what-is-a-fixed-rate-mortgage\">fixed-rate mortgages<\/a> don\u2019t change after the mortgage is issued. That means <strong>if you already have a fixed-rate mortgage, you won\u2019t be immediately impacted by any policy rate changes<\/strong>.<\/p>\n\n\n\n<p>That said, the <strong>going rate for new fixed-rate mortgages and mortgage renewals does change and is strongly influenced by Canada\u2019s five-year bond yield<\/strong>. If the yield on the five-year bond rises, the interest rates for new fixed-rate mortgages also tend to increase since lenders need to offer higher rates to attract investors. Conversely, if the five-year bond yield falls, the interest rates for new fixed-rate mortgages usually decrease.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"interest-rate-reductions-and-mortgage-renewals\">Interest Rate Reductions and Mortgage Renewals<\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"684\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2022\/10\/Mortgage-trigger-rate-1024x684.png\" alt=\"Mortgage Providers\" class=\"wp-image-22259\"\/><\/figure>\n\n\n\n<p>In 2024 and 2025, about <a href=\"https:\/\/www.cmhc-schl.gc.ca\/blog\/2023\/rising-rates-homeowners-greatest-shocks-lie-ahead#:~:text=Many%20mortgage%20consumers,a%20variable%20rate\">2.2 million mortgages will be up for renewal<\/a>, representing about 45% of all mortgages in Canada. Most of these borrowers will be renewing at a higher mortgage rate. These mortgage rate reductions will help offset some of the shock these borrowers may feel at renewal.<\/p>\n\n\n\n<section class=\"wp-block-zolo-related flex items-center py-6 leading-tight border-t border-b border-blacklight undefined\"><p class=\"font-serif pr-6 md:pr-12 mr-6 md:flex-shrink-0 border-r border-blacklight\">Related content<\/p><p class=\"related-link w-full my-0\"><a href=\"https:\/\/www.zolo.ca\/blog\/mortgage-renewal\">How to Complete Your Mortgage Renewal<\/a><\/p><\/section>\n\n\n\n<p>While the mortgage interest rate cut in Canada is positive news for homeowners, many mortgage holders renewing in <strong>2024 and 2025 will still feel the impact of higher rates compared to their current mortgage term.<\/strong><\/p>\n\n\n\n<p>For example, assume you have a $500,000 mortgage and a 2.20% interest rate.&nbsp;Your monthly payment would be $2,166.<\/p>\n\n\n\n<p>If you renewed your mortgage at today\u2019s best five-year fixed rate of 4.54%, your monthly payment will rise to $2,778. That\u2019s an increase of $600 per month. Sure, the new interest rate is lower than it would\u2019ve been six months ago, but it\u2019s still higher than your original mortgage rate.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"interest-rate-reductions-are-good-for-canadian-homebuyers\">Interest Rate Reductions Are Good for Canadian Homebuyers<\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"700\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2022\/02\/should-you-rent-or-buy-in-2022-1024x700.jpg\" alt=\"a man and woman look at kitchen cabinets with a male real estate agent\" class=\"wp-image-20524\"\/><\/figure>\n\n\n\n<p>For prospective buyers, the recent rate cut signals a positive trend. Over the last two years, the BOC raised its policy rate significantly, impacting affordability and mortgage options. The <strong>recent decrease is a positive sign for new buyers who will start to see mortgage rates come down, and with it, their buying power increases.<\/strong><\/p>\n\n\n\n<p>At the same time, upcoming renewal stress and the lagging, compounding impact of the interest rate hiking cycle have created an increase in supply in the market. The supply and demand imbalance created by our new interest-rate reality has put many Canadian real estate markets into <a href=\"https:\/\/www.zolo.ca\/blog\/real-estate-markets-for-buyers\">buyer\u2019s market<\/a> territory for the first time in decades.<\/p>\n\n\n\n<section class=\"wp-block-zolo-related flex items-center py-6 leading-tight border-t border-b border-blacklight undefined\"><p class=\"font-serif pr-6 md:pr-12 mr-6 md:flex-shrink-0 border-r border-blacklight\">Related content<\/p><p class=\"related-link w-full my-0\"><a href=\"https:\/\/www.zolo.ca\/blog\/mortgage-approval\">How to Get Approved For a Mortgage<\/a><\/p><\/section>\n\n\n\n<p>A buyer&#8217;s market in real estate occurs when the supply of available properties exceeds the demand from potential buyers. This situation typically results in lower home prices and gives buyers more negotiating power. Characteristics of a buyer&#8217;s market include:<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li><strong>Increased inventory<\/strong> &#8211; There are more homes for sale than there are buyers<\/li><li><strong>Longer time on market<\/strong> &#8211; Properties tend to stay on the market for a longer period before being sold<\/li><li><strong>Price reductions<\/strong> &#8211; Sellers may lower their asking prices to attract buyers<\/li><li><strong>Greater negotiation leverage<\/strong> &#8211; Buyers can negotiate more favourable terms, such as lower prices, seller concessions, or additional repairs or improvements<\/li><li><strong>Fewer bidding wars<\/strong> &#8211; Multiple offers and bidding wars are less common, allowing buyers to take their time when making decisions<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"the-bottom-line-on-mortgage-interest-rate-cuts-in-canada\">The Bottom Line on Mortgage Interest Rate Cuts in Canada<\/h2>\n\n\n\n<p>Over the last two years, the BOC rapidly raised its policy rate from 0.25% in March 2022 to 5% by July 2023. This increase brought about higher mortgage rates \u2013 and more expensive mortgage payments. Higher interest rates affected affordability and mortgage options, leaving many on the sidelines waiting for rates to cool.<\/p>\n\n\n\n<p>With the recent interest rate announcement, the decrease is undoubtedly a positive sign for new buyers who will start seeing mortgage rates come down. While 25 basis points won\u2019t significantly change the game for homebuyers today, the <strong>decrease is widely considered to be the start of a trend of lowering rates<\/strong> \u2013 and as rates go down, so will mortgage-related costs.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The recent mortgage interest rate cuts in Canada increase your buying power &#8211; what does that mean for buyers?<\/p>\n","protected":false},"author":115,"featured_media":23973,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[47],"tags":[],"guide":[],"class_list":["post-23972","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buying"],"acf":[],"zolo_excerpt":"","_links":{"self":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/23972","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/users\/115"}],"replies":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/comments?post=23972"}],"version-history":[{"count":7,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/23972\/revisions"}],"predecessor-version":[{"id":23995,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/23972\/revisions\/23995"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/media\/23973"}],"wp:attachment":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/media?parent=23972"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/categories?post=23972"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/tags?post=23972"},{"taxonomy":"guide","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/guide?post=23972"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}