Today, July 24, 2024, the Bank of Canada has reduced its key interest rate to 4.5%, marking the second consecutive cut as part of its strategy to control inflation and support economic growth. Governor Tiff Macklem suggested further reductions could occur if inflation continues to ease. This move aims to provide relief and hope to homeowners and borrowers.
Key Facts from the Bank of Canada's Recent Interest Rate Cut |
Interest Rate Reduction: The Bank of Canada cut its key interest rate to 4.5%, marking the second consecutive reduction. |
Future Cuts Possible: Governor Tiff Macklem indicated that more cuts could follow if inflation continues to ease. |
Impact on Mortgages: A 25-basis-point drop can save homeowners about $15 per $100,000 of mortgage in monthly payments. |
Economic Predictions: Bloomberg Economics forecasts interest rates might drop to 3.25% by the end of 2025. |
Next Announcement: The next interest rate decision is scheduled for September 4. |
Interest Rate Reduction: What You Need to Know
The Bank of Canada has cut its key interest rate to 4.5%. This is the second consecutive reduction aimed at controlling inflation and boosting economic growth. Governor Tiff Macklem indicated that more cuts could follow if inflation continues to ease.
Mortgage Lenders Lower Key Lending Rates After Bank of Canada Rate Cut
In response to the Bank of Canada's decision to reduce its overnight target rate to 4.50%, mortgage lenders across Canada, including the Big 6 banks, have announced a 25 basis point (0.25%) cut to their key lending rates. This adjustment lowers the prime rate offered by most lenders to 6.70%, down from a recent peak of 7.20% just two months prior. Notably, TD Bank remains an exception, with its mortgage prime rate priced 15 bps higher due to an independent rate hike in 2016.
This is the second rate reduction for variable-rate borrowers and those with personal or home equity lines of credit (HELOCs) since June, as the central bank aims to bolster Canada’s weakening economy.
Benefits For Borrowers
Variable-Rate Mortgage Holders Borrowers with existing variable-rate mortgages will benefit the most, experiencing a reduction of a quarter of a percentage point in their mortgage rate. Adjustable-rate mortgage holders, whose payments change with rate fluctuations, will see a decrease of about $15 per $100,000 of mortgage based on a 25-year amortization. For example, a borrower with a $400,000 mortgage can expect to save approximately $60 a month following this rate cut. Combined with last month’s reduction, these borrowers will now see their payments drop by about $120 a month.
Fixed-Payment Variable-Rate Mortgage Holders Those with fixed-payment variable-rate mortgages, which account for about 15% of mortgages in Canada, will see a shift in payment allocation. As the prime rate falls, a larger portion of their payments will go towards the principal, while the interest portion decreases.
Fixed-Rate Mortgage Borrowers Fixed-rate mortgage holders will not be affected by this change, as their rates remain unchanged for the term of their loan.
Other Loans Other loans tied to the prime rate, such as certain personal loans or lines of credit, will also experience a reduction in interest charges or monthly payments.
Rising Popularity of Variable Rates
With the prime rate now at 6.70% and further cuts anticipated, variable-rate mortgages are becoming more attractive to borrowers. In the first quarter, 12.9% of new mortgage borrowers chose a variable-rate mortgage, up from 4.2% in the third quarter of 2023, according to the Bank of Canada. However, this is still below the peak of nearly 57% during the pandemic when variable rates were more favorable than fixed rates.
Mortgage broker and rate expert Dave Larock of Integrated Mortgage Planners suggests that today’s variable-rate mortgages may outperform fixed-rate options, provided borrowers are prepared to start their term with higher rates compared to fixed-rate alternatives.
Economic Implications
Impact on Loan Interest Rates Lower rates reduce the cost of borrowing for mortgages, personal loans, and business loans, potentially spurring economic activity.
Boost to Economic Growth and Spending Cheaper borrowing costs encourage consumers and businesses to spend and invest more, driving economic growth.
Expert Opinions
Victor Tran, Ratesdotca
Victor Tran highlights the immediate savings for homeowners, noting that lower interest rates can significantly reduce monthly mortgage payments, providing financial relief.
Karen Yolevski, Royal LePage Real Estate Services Ltd.
Karen Yolevski notes increased confidence among buyers and sellers in the real estate market. Lower interest rates can make homeownership more attainable, encouraging more transactions and activity in the housing market.
Challenges: Rising Costs Despite Lower Rates
While interest rate cuts reduce mortgage payments, other expenses such as rent, insurance, taxes, and maintenance continue to rise, putting pressure on overall shelter costs.
Future Rate Cuts and Economic Outlook
Bloomberg Economics' Projections
Bloomberg Economics forecasts that the Bank of Canada will continue to cut rates quarterly, potentially lowering the overnight rate to 4.25% by the end of the year. Analysts predict a continued decline in interest rates, potentially reaching 3.25% by the end of 2025, offering more relief to borrowers.
Upcoming Rate Cuts
The Bank of Canada may reduce rates further in upcoming meetings, aligning with global economic trends.
Final Thoughts
The anticipated rate drop over the next 18 months could provide significant financial relief for indebted British Columbians. With strategic rate cuts aimed at balancing growth and inflation, homeowners should stay informed about upcoming changes.
References:
Benchetrit, J. (2024, July 24). Bank of Canada cuts key interest rate again, more cuts 'reasonable' if inflation keeps easing. CBC News.
Canadian Press. (2024, July 24). Bank of Canada cuts interest rate, signals more to come if inflation keeps dropping. CTV News.
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