The Bank of Canada has cut its key lending rate by a quarter point, lowering the policy rate to 2.5 per cent. It’s the first change since March and comes as the central bank tries to support a weakening economy and give Canadians some relief from high borrowing costs. Why the bank made the move Governor Tiff Macklem said the decision was based on slowing growth and easing inflationary pressures. “Inflationary pressures look a little more contained and against that background and the background of a weakening economy, that will put additional downward pressure on inflation that tipped the balance of risks in favor of cutting our policy rate today, but we are proceeding carefully. We are going to be balancing those risks, and we don’t want Canadians to have to worry about big increases in the cost of living,” he said. The central bank pointed to Canada’s economy contracting in the second quarter, a steep drop in exports, and rising unemployment, which hit 7.1 per cent in August. Inflation slowed to 1.9 per cent, which is within the bank’s target range. What this means for mortgages For homeowners, the decision has immediate impacts for households with variable rate mortgages. Rebecca Casey, the president of the Canadian Mortgage Brokers Association of B.C., said the cut will translate into modest but meaningful savings. “If you’re a variable rate mortgage holder, your interest rate has gone down today by 25 basis points, by 0.25 per cent. That means for every $100,000 you owe, your payment should go down by about $13 per month if you’re in the type of variable rate mortgage, but your payments fluctuate if you’re not. If you’re in a static payment variable rate mortgage, you’re just now going to be paying off more of your mortgage with every single mortgage payment.” Advice for those nearing renewal Casey said anyone approaching renewal should carefully consider their options. “I would recommend speaking with a professional as part of your plan. But if you’re in a position to delay committing to your next term for a little bit longer, that would probably be ideal, as we do expect interest rates to continue to trend downward,” she said. If you’re locked into a fixed rate Casey said breaking a fixed mortgage to get a lower rate can make sense in some cases, but it depends on the penalty. She explained that scenarios are handled on a case-by-case basis and professional mortgage brokers will give you the tools you need to make that decision. She says they can help you calculate your mortgage penalty to weigh that against the savings that you would have. Those numbers will help you decide whether you should take on a new term at a lower interest rate. Casey said she recently had a client whose penalty was less than $4,000, but over the remaining term of their mortgage, breaking their mortgage would save $7,500, so it made sense to do so. “It dropped their payments, it eased the cash flow pressures, and it allowed them to budget a little bit better. So sometimes that’s the case. In other cases, the penalty is just too high, and it’s better that you just ride out the rest of your term and be prepared for renewal when your term comes to an end,” she explained. What you can do in the meantime Casey said homeowners who want to benefit from future rate cuts without locking in too soon should consider a flexible approach. “It’s okay to take a variable rate for the temporary purpose of seeing where interest rates land with these future cuts, and then you can always turn around and request that your lender locks in that rate and convert it into a fixed rate.” She says variable rate mortgages have lower penalties than fixed rate mortgages, typically. “So it is a good time to consider a variable rate, but most of all, you should be taking guidance and advice from a licensed independent mortgage broker whose got your back.” Calls for more cuts Casey also said while today’s move is encouraging, she would like to see the Bank of Canada go further. “We are encouraged by the news. Absolutely, it is a step in the right direction. We want to see more cuts, because consumer confidence is quite low, the unemployment rate is at a historical high, and risks of further inflation are now coming down. So this is an expected cut. It’s a step in the right direction. It’s promising. However, we’re calling for more.” How the housing market is reacting In Metro Vancouver and the Fraser Valley, Realtors say the cut is unlikely to change affordability overnight, but could help shift sentiment. Adil Dinani, a sales representative with Royal LePage, said, “I think it’s going to be well received by homebuyers who are looking for a reason or a catalyst to come off the sidelines. You know, a quarter point certainly doesn’t change the entire situation for a homebuyer, but it certainly sends a positive message that rates are going in the right direction.” More listings, more leverage for buyers Dinani added that buyers now have far more choice than they did during the height of the pandemic. “In Greater Vancouver, we’re sitting at over 16,000 listings for the first time in nearly a decade. So the silver lining, I would say, in this more buyers’ market environment, is that buyers have choice and time. There’s a lot of supply on the market, and buyers can take their time making thoughtful, prudent decisions versus being rushed into making a purchase quickly.” Dinani says in some areas of the Lower Mainland, homes have gone back to pre-Covid pricing. “There are some tremendous opportunities out there. In some areas, we’ve seen prices come off between 15 and 20 per cent depending on the neighborhood,” said the realtor. What’s next The Bank of Canada’s next interest rate decision is scheduled for October 29. Until then, economists, brokers and realtors will be watching closely to see whether Wednesday’s cut sparks renewed activity in British Columbia’s real estate market — and whether more relief is still to come.
