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Mortgage Minute 33: Bank of Canada Lowers Interest Rates And What It Means for You

In a significant move, the Bank of Canada has lowered its interest rate by a quarter percent. This marks the first rate decrease since the Bank began raising rates in early 2022 to combat surging inflation following the COVID-19 shutdowns. The announcement, made on the morning of June 5th, 2024, signals a potential shift in the economic landscape. Here’s a detailed breakdown of what this means and what to expect in the coming months.

Interest Rates Going Down

Background on Interest Rate Changes

The Bank of Canada’s decision to increase interest rates in 2022 was a direct response to inflation, which had been climbing rapidly. The peak of this inflation occurred in early 2023, coinciding with the start of the interest rate hikes. Since then, it has been a challenging journey to bring inflation back to the desired 2% mark. While the process has taken longer than anticipated, there is optimism that the inflation rate will stabilize around this target soon.

Impact on Fixed and Variable Mortgage Rates

For those with fixed mortgage rates or pre-approved fixed rate mortgages, today’s interest rate change does not affect your payments. Fixed interest rates for three, four, or five-year terms are unlikely to see immediate changes as a result of this announcement. However, if you have a variable rate mortgage, you can expect a small decrease in your monthly payments starting as early as July.

Future Rate Decreases

The current rate decrease is expected to be the first of several. The Bank of Canada Governor, Tiff Macklem, indicated that further cuts to the policy interest rate are likely, though the Bank will continue to assess the situation on a meeting-by-meeting basis. It is reasonable to expect up to three more rate decreases before the end of the year, potentially bringing the policy rate down to 4% and the prime rate to 6.2%. This could result in new variable rate mortgages being offered at approximately 5.25% by the end of 2024.

Employment Growth being outpaced by population growth

Economic Indicators and Housing Market

The decision to lower interest rates was influenced by several economic indicators. Recent GDP numbers have been slightly lower than expected, and while employment is growing, it is not keeping pace with the increasing working-age population, partly due to high immigration rates. Additionally, the housing market continues to experience significant pressure, with home prices and rents remaining high. Lower interest rates historically tend to increase housing prices further, as borrowing becomes cheaper.

Advice for Potential Homebuyers

If you are considering purchasing a home soon, it may be wise to act sooner rather than later. Locking in a rate at today’s levels could save you money compared to waiting and facing higher home prices in the future. Even if interest rates drop further, securing a house price now may be more beneficial than the potential savings on interest rates later. Reach out to us to discuss your options and secure the best rates available today.

Conclusion

The Bank of Canada’s first rate decrease in over two years marks a significant shift in monetary policy. While it offers some relief to those with variable rate mortgages, the broader economic implications are complex. Monitoring future rate announcements and understanding how they affect your financial situation is crucial. As always, our team is here to help you navigate these changes and make informed decisions.

If you have any questions or need assistance, feel free to contact us. We look forward to working with you and helping you achieve your financial goals.

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Josh

June 6, 2024

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