Bank of Canada rate cut : Find out how it affects your mortgage

The cut is small, but signals that the era of rising interest rates is over and more substantial relief is on the horizon.

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Vancouver homeowners stressed by high variable-rate mortgages received some relief in their payments with the Bank of Canada’s decision Wednesday to cut its key lending rate.

The Bank of Canada’s key rate peaked at five per cent last July, which the bank had ratcheted up from 0.5 per cent in March of 2022 as a measure to curb inflation. On Wednesday, bank governor Tiff Macklem said the cut to 4.75 per cent has “increased our confidence that inflation will continue to move toward the two per cent target.”

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On the surface, a quarter-point cut “is not that big of a deal,” but it does signal Canada has shifted into a rate-cutting phase, “and that is a big deal,” said James Laird, co-CEO of the rate search website

Phones are “ringing off the hook, text messages, emails, every inbox that I have is full,” said Rebecca Casey, president of the Canadian Mortgage Brokers Association of B.C. “Honestly, it’s such a relief.

james laird
This move is a signal that Canada has shifted into a rate-cutting phase, says Ratehub’s James Laird. Photo by Peter J Thompson

What will the rate cut mean for housing costs?

“The basic metric here is that this cut equates to approximately $15 per month per $100,000 that you’ve borrowed on a variable rate mortgage,” Casey said. This amounts to $75 on a $500,000 mortgage, $150 on $1 million.

“If you are a client who took a variable rate mortgage and your payments increased through the last two years, you will see an immediate reduction in your next payment.”

Laird said variable mortgage rates will be in the 5.75 to 6.25 per cent range, down from the six to 6.5 per cent range they were holding at.

The relief is small, but will compound with future cuts and Laird added that the up side for variable-rate mortgage holders who stuck it out: “You’re thinking ahead (to) what might my payment be by November, what could it be next March — maybe it’ll be $500 lower next summer.”

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Homeowners with fixed-rate mortgages won’t see any change in their payments, but Casey said this means they won’t be seeing increasing mortgage rates in future.

How does this affect mortgage renewals?

Laird said the environment for mortgage renewal is better today than it was yesterday, but homeowners who need to roll over mortgages at rates below two per cent — which were not uncommon before the Bank of Canada started raising rates — still have to do so at higher rates.

“The second half of this year and next year will be a better time to renew your mortgage than last year, that’s for sure,” Laird said.

Laird said fixed rates range from 4.75 per cent to five per cent now, and there’s the likelihood they’ll begin to come down by the end of the week.

“For people renewing their mortgage, it just means they’re going to have other options,” Casey said.

For one, their renewal rate on fixed rates won’t be as big of a jump as they feared, Casey said. Depending on their risk tolerance, renewers might again consider a variable-rate mortgage as rates come down.

Laird cautioned that there is no guarantee rates will continue declining, and it would take two years of consistent Bank of Canada cuts to bring rates down two percentage points.

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Does the rate cut help buyers qualify for mortgages?

Laird said the cut won’t help a lot.

“If you didn’t qualify yesterday, you probably won’t qualify today,” he said.  But the cut will marginally increase the amount that qualifying buyers will be able to borrow. And this cut is likely the first of many.

Casey said instead of buyers being told they qualify to borrow less than they could have before the cuts, the cut gives them $25,000 to $40,000 “extra room that borrowers now qualify for.”

“It’s not going to be the difference of trying to get in from a townhouse to a detached house, (but) it’s just going in the positive direction,” Casey said.

What about the bigger picture?

The changes in variable interest rates will flow from the influence that the Bank of Canada’s key rate, known as its overnight lending rate, has on the prime lending rate of the major banks, with cuts affecting car loans, credit card rates and other debts.

“It’s a positive signal especially for folks who are leveraged, who have been amassing debt to survive this period of high inflation, high gas prices, high grocery prices,” Casey said. “This will impact families and homeowners in a positive way.”

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