What does the Bank of Canada’s jumbo rate cut mean for mortgages and the housing market?

The Bank of Canada’s latest moves to cut interest rates could spur more buying activity in the housing market, experts say, but some buyers may still be waiting for the final rate decision of the year.

The Bank of Canada on Wednesday decided to cut its key interest rate by 0.50 percentage points to 3.75 percent. The sharp rate cut (the standard is a 0.25 percent change) came in response to the latest inflation data, and the central bank says its focus has shifted from reducing inflation to maintaining inflation in its target range of 1 to 3 percent. The move marks the central bank’s fourth consecutive rate cut since June.

Phil Soper, president and CEO of Royal LePage, says Canada’s housing market has been “sluggish” in many regions recently due to higher borrowing costs, “but today’s more aggressive rate cut could quickly turn things around.”

“With each rate cut, more home buyers are expected to enter the market. In turn, increased demand will lead to faster home price growth, which will offset the benefits of lower borrowing costs,” he said.

Soper added that after such a rate cut, “the spring market may arrive sooner than expected.” The question now is whether it will be enough to “change the prevailing conditions in the housing market.”

While it will likely encourage some buyers to enter the market and may prompt more sellers to list homes in anticipation of these buyers, it is likely that many will wait until the final rate announcement of the year on December 11 before making a move.

No one can predict what will happen in the market with any degree of accuracy, and buyers certainly cannot calculate the ideal time to buy.

The combination of a 0.50% rate cut and upcoming mortgage rule changes in December creates an opportune moment for buyers to make their move. With an abundance of available housing, current market conditions are extremely favorable for potential homebuyers.

Buyers expecting rates and house prices to fall further may instead be waiting for a hotter housing market.

Once rates fall to a level that most buyers are comfortable with, the housing market will heat up quickly and prices will rise. Potential buyers should consider buying now if they can, and consider an adjustable-rate mortgage to enter the market.

Alana Riley, head of mortgage, insurance and banking at IG Wealth Management, believes that we will see further cuts from the Bank of Canada in late 2024 and 2025.

Any significant increase in sales activity or house prices will likely be a signal to buyers that they need to act quickly. We may see the market make a “psychological shift in the coming weeks.”

“But once the market starts to move, it will likely heat up quickly, pushing house prices higher. “This could lead to an unseasonably strong winter and a busy spring season in 2025,” she said.

“We also expect these rate cuts to help cushion the shock for homeowners facing higher rates when their mortgages renew,” said Alana Riley.

“House price inflation remains high, driven by rental costs and mortgage interest rates, and continues to be the largest contributor to overall personal inflation.”

The reduction in mortgage costs is great news for homeowners with mortgages coming up over the next 12 to 24 months.

While rates will still be higher than they were three to five years ago, payment increases are likely to be more manageable than they would have been at the start of the rate-cutting cycle.

Already late Wednesday, the big banks cut their Prime rates by 0.50% to 5.95%, which will immediately impact variable rate mortgages and lines of credit.

Those with variable rate mortgages will see either their monthly payments or the portion of their payment that pays interest go down.

With lower Prime rates, homeowners with variable rate and fixed payment mortgages will see more of their payments go toward paying down the principal of their mortgage. For those with variable mortgages or HELOCs (home equity lines of credit), their payment will go down starting next term.

For example, for every $100,000 remaining on a variable rate mortgage, the monthly payment will go down by about $28-$30. For every $100,000 in a HELOC, the savings in interest payments will be about $42 per month.

However, for fixed-rate mortgages, the Bank of Canada’s October rate cut is unlikely to result in an immediate reduction, as they are dependent on government bond yields.

The Bank of Canada’s next and final meeting of the year will be on December 11.