How Does The Bank Of Canada Rate Cut Affect The Housing Market?

It finally happened. The first interest rate cut of 25 basis points from the Bank of Canada took place on June 5th. Somewhat welcome news to those homeowners with variable rate mortgages, but not enough for prospective homebuyers who have been sidelined by higher borrowing costs.

Theoretically, interest rate cuts over the long run usually give housing prices a boost as generally, people can afford to borrow more and can spend more, therefore can bid more on homes. This creates more activity in the housing market and the increase in demand sees rising prices.

While a quarter of a point does not make much of a difference, psychologically it is in the right direction and there is optimism that the rates are going to fall much lower. This gives prospective buyers the confidence to make a move, because the Bank of Canada usually does a series of rate cuts over time, and this builds momentum.

This particular cut equates to approximately $15 per $100,000 borrowed on a variable rate mortgage. If you have borrowed $500,000, your monthly payment will be reduced by $75 and on $1,000,000 it will be $150, effective immediately.

In January of this year, a poll conducted by Royal LePage showed that 10% of Canadians would be ready to go house hunting if the Bank of Canada lowered the rate by 25 basis points. 

For current homeowners, especially the younger ones who bought during the pandemic era when interest rates were at record lows, there is a fear that they will not be able to hold on to their homes when renewal time comes this year or mid 2025. Most will opt for a fixed rate instead of a variable rate.

The rate cut will not help more buyers qualify for a mortgage. It is more likely to marginally increase the amount that qualifying buyers will be able to borrow. So instead of buyers being told they qualify to borrow less than they could have before the cuts, the cuts give them approximately $25,000 – $40,0000 more room to qualify for.

Predicting how aggressively the rates will be cut is difficult to judge, and there is a lot of consensus among experts that we will still see higher interest rates for at least the next few years, and we will not be going back to the 2% mortgages of the past.

If you are looking for a home, you need to work with the real estate advisor who is well versed in your area and has the resources to make your dream come true. Professional real estate advisors such as ours, will make setting up viewings easy and will help negotiate the best price for you when you are ready to purchase. Contact us and one of our real estate advisors will help take the stress out of your real estate journey.
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