Bank of Canada rate cuts and its impact on mortgage rates

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, “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, 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 »