At its fourth announcement of the year on June 5, 2024, the Bank of Canada lowered its target for the overnight rate by 0.25% from 5.00% to 4.75%. This is the first rate cut implemented by the central bank since March 2020.
The Bank pointed to steadily improving inflation data as the driver of its decision, with April’s CPI coming in at 2.7% and “core” trim and median measures down to 2.6% and 3.2%, respectively.
Anyone with a variable-rate mortgage or a home equity line of credit (HELOC) will undoubtedly be very pleased with the Bank’s decision, as their rates will finally begin descending from a nearly 20-year high.
Although fixed mortgage rates are tied to the bond market and are thus not directly impacted by the Bank of Canada’s rate cut, bond yields have dropped about 30 basis points in the days leading up to the Bank’s announcement. With a rate cut now having taken place, lenders are likely to reduce their fixed-rate mortgage products in the days to come.
Canadians looking to buy a home or whose mortgage is up for renewal should get a rate hold to ensure they can take advantage of the best rate possible. As mortgage rates go down during the time of your rate hold, you will be eligible for the lowest rate.
It will be interesting to see what effect this announcement will have on the housing market. While a 0.25% rate cut does not offer major relief from currently elevated prices and borrowing costs, buyers may be more inclined to enter a declining rate market, in part due to anxiety over missing their ideal buying window should demand ramp up.
May 2024: Mortgage Market Update
The early months of 2024 were volatile for the Canadian housing market, but there are early signs that sales activity will improve, as expectations rise that rate cuts could come from the Bank of Canada as early as the summer months.
Bond yields, however, continue to roller coaster up and down, as investors react to conflicting economic data reports. After tumbling in December and January, they’re now in the upper 3% range, as markets are anxious over a “higher for longer” stance from the US Federal Reserve.
Overall, variable and fixed mortgage rates remain historically elevated. If you’re shopping for a mortgage rate in Canada right now, here are some economic factors you should be aware of.
Real Estate Update
The latest April data, released by the Canadian Real Estate Association (CREA) on May 15, 2024, shows things have yet to heat up for Canada’s typically busy spring market. Home buyers largely stuck to the sidelines over the course of the month, causing sales to drop 1.7% from March, with a total of 37,745 transactions. On an annual basis, that is up 10%, though CREA largely attributes this increase to the timing of the Easter long weekend. However, while sales have slowed, the number of newly listed homes continues to grow; a total of 70,346 homes were brought to market, well outpacing that of sales.
The result is a slowdown in the national average home price, which fell 1.8% year over year to an average of $703,446. New listings outnumbering sales has also resulted in better market balance – the national sales-to-new-listings ratio (SNLR) fell to 53.4%. This metric measures the level of competition within the housing market; a ratio between 45% and 65% is generally consistent with balanced housing market conditions, with readings above and below this range indicating sellers’ and buyers’ markets respectively.
CPI Update
The April Consumer Price Index (CPI) report from Statistics Canada, released on May 21, 2024, shows steady progress continues to be made in reducing inflation’s growth, with the headline number coming in at 2.7%. That’s down from the 2.9% recorded in March, and is the lowest the inflation rate has been since March 2021. It also marks the fourth month in a row that the metric is within the Bank of Canada’s 1-3% target range, which is positive news for the Bank of Canada, which has been working to reduce the measure’s pace of growth.
According to the report, food costs are on the decline, slowing to 1.4% in April, from 1.9% the previous month. However, gas prices rose during the same time period, with consumers paying 6.1% more at the pump on an annual basis. Shelter costs continue to be the largest contributor to inflation’s growth; mortgage interest costs are up 24.5% year over year, while rents rose 8.2%.
Overall, however, the Bank of Canada should be encouraged by this month’s promising report; two of the central bank’s preferred metrics – called the CPI Median and CPI Trim – also lowered in April, to 2.6% and 3.2%, respectively. This should help pave the way for the BoC to cut its trend-setting interest rate as early as its upcoming announcement on June 5th; markets are currently pricing in 50% odds.
2024 Housing Market Forecast
CREA also updated its forecast for 2024 and 2025, due to growing expectations of rate cuts, and pent-up home buyer demand.
It anticipates a total of 492,083 homes will be sold in 2024, up 10.5% from 2023. Sales growth is expected to be strongest in provinces where housing demand has been consistent, such as Alberta. However, markets that have seen “historically low sales volume”, such as Ontario, BC, and Nova Scotia, will also see growth. The national average home price will rise by 4.9% to $710,468 in 2024.
Activity will continue to pick up steam in 2025, with sales to hit 530,494 units – an increase of 7.8%, and the national average home price to rise by 7% to $760,120.
Factors That Can Affect Your Mortgage Rate in Canada
It’s important to understand that the best mortgage rate you qualify for may change depending on your unique borrowing profile. Here are some of the factors that influence what mortgage rate you qualify for:
The Type of Mortgage
If your mortgage is for a refinance, rather than a purchase or renewal, you’ll be eligible for higher rates. For individuals with an existing mortgage who have good credit and more than 20% equity in their homes, in addition to refinancing, you can also explore a home equity line of credit (HELOC).
Your Down Payment
If you’re purchasing a home and your down payment is less than 20% of the purchase price and the value of the home you are purchasing is less than $1 million, you’ll be required to purchase mortgage default insurance (sometimes known as CMHC insurance). This insurance is added to your mortgage amount and, while it will cost you money, it will result in a lower mortgage rate as your mortgage is less risky for your lender. If you’re renewing your mortgage, in order to be eligible for the lowest mortgage rates you would have needed to purchase CMHC insurance on the original mortgage.
Your Intended Use of the Property
Your mortgage rate will be higher if you plan to rent your property out versus living in it as your primary residence.
Your Amortization Period
Insurable mortgages (i.e., mortgages for homes valued at less than $1 million with a down payment of less than 20% of the purchase price) in Canada have a maximum amortization period of 25 years. Regardless of the price of your home, if you make a down payment of at least 20%, you are able to access a mortgage that allows a longer amortization period, such as a 30-year period. While longer amortization periods will usually result in a lower monthly payment, they can come with a slightly higher interest rate. Moreover, by taking longer to pay back the mortgage, you will pay more in interest overall than you would with a shorter amortization period.
