Bank of Canada rate cuts and its impact on mortgage rates

What you need to know as a home buyer, seller or real estate investor

  2

by

Online only.

  2
mortgage payments

Bank of Canada rate cuts and its impact on mortgage rates (mstay/Getty Images)

For home buyers and sellers it could be considered Christmas in July. The Bank of Canada rate cut today already prompted one bank to cut its lending rate and others are expected to follow.

But is this good news? Well it depends where you are in the real estate cycle.

Buying a home

If you’re in the market to buy a home, today is just another day. Sorry. It’s just not Christmas in July. Why, you ask? Because the BoC’s rate cut won’t translate into any new significant savings. Both fixed and variable rates are already at historically low levels and any cut the banks will offer will be minimal, at best.

But the rate cut is still good news. It means that your cost to buy that home continues to be extremely low and will remain low for the next few months, at least. What’s even crazier is the possibility that rates could actually drop again this year. “Economists believe there’s more than a 70% chance of another rate cut in September,” says Robert McLister of RateSpy.com, “and there’s a good chance that bond yields will also drop.” Since fixed mortgage rates follow bond rates this could mean further reductions in already ridiculously low fixed mortgages. “Don’t be surprised if we start to see 1.99% five-year fixed rates next spring,” says McLister. And if you thought the housing market was crazy now, just wait.

Selling a home

For home sellers this could be an early holiday gift. The rate cut is good news because it means that the national housing market has nothing hampering its continued growth and strength. Of course, those in Toronto and Vancouver should cheer as continued low rates, coupled with low inventory, means a seller’s market, and this translates into big gains for the home seller.

Real estate investor

Every prudent investor will tell you that if you borrow at a low rate and invest at a high rate, that’s sound financial management. But just because rates are low doesn’t mean you should just borrow and invest in a real estate rental property (or other type of investment). This decision really needs to be part of an overall strategy and that strategy needs to consider the impact of rising rates. While we haven’t seen rates rise in five years, we all know that eventually they will rise and when they do people that are stretched or over-leveraged will start to feel the impact. That’s when a good bet turns into a bad investment.

Want to know more? Here’s the Maclean’s live chat discussion on the topic.

So why cut rates at all?

This past January the banks were caught off-guard when the Bank of Canada cut its overnight rate for the first time since 2010. As a result the banks were slow to react and slow to announce savings. And this led to a big consumer backlash. The banks learned from that.

As such, you could expect cuts to variable rate mortgages but the banks will probably only pass on partial savings. Maybe a 0.10% to 0.15% cut but not the full 0.25% cut.

According to Penelope Graham, editor for RateSuperMarket.ca, the banks won’t pass on the full savings because they’re already pushed close to the break-even point. “They really don’t have room to discount too much,” explains Graham. There’s only 2.5% until absolute 0%—and that bottom will have a serious impact on their profit margins.
Read more from Romana King at Home Owner on Facebook »

2 comments on “Bank of Canada rate cuts and its impact on mortgage rates

  1. “They really don’t have room to discount too much,” explains Graham. There’s only 2.5% until absolute 0%—and that bottom will have a serious impact on their profit margins.

    umm…….no. The banks make money on the spread between what they pay, and what the borrower pays. If the banks borrowing costs drop by 0.25% then the spread between them and the borrower increases by 0.25%. If banks only drop the borrowers cost by 0.1% then they are making more money, not less.

    The banks would be all too happy to have interest rates drop to zero if they can increase the spread 0.15% for every 0.25% drop and if interest rates went to zero, the banks would be making money risk free as they borrowed at zero and charged a positive rate to borrowers.

    Reply

    • This is so much crap, if the banks borrow at say 7% and give you a mortgage at 10.5% then they make 50% on their money. But if they borrow at .5% and give you a mortgage at 2.5% then they make 500% on their money.
      This is the same bs we as Canadians put up with from Governments, brokerage houses and all banks…this is great for you…but way better for us.
      I wish the “business media” could be impartial, instead of feeding us the corporate line or worse, telling us that everything is ok and as they run for the hills. You know when an expert on a stock is lieing…it’s when he/she opens their mouth.

      Reply

Leave a comment

Your email address will not be published. Required fields are marked *