On June 5th, the Bank of Canada interest rate was cut by 25 basis points to 4.75 percent. This is the first key policy rate cut since March 2020. While it’s a welcomed move to help reduce borrowing costs for Canadians, many people are curious about the impact on the housing market.
Will the Bank of Canada interest rate cut make it easier to buy a house? What does it mean for homeowners who are set to renew their mortgages this year? Read on to learn more about the impact the cut is projected to have on mortgage rates and the housing market in general.
Impact on affordability
On the heels of the rate cut, all of the big six Canadian banks cut their prime rates by a quarter-percentage point. The impact however of a single 25-basis-point rate cut will be marginal for most.
While much progress has been made in lowering inflation, the Bank of Canada doesn’t want to lower rates too quickly and risk the progress that has been made.
So with that in mind, June 5th’s rate cut is a small but important step in a cut cycle that is anticipated to unfold over the next year and a half. Some experts predict another 25 basis point cut in July and two more cuts before the end of 2024 provided inflation remains stable.
What to expect with a variable mortgage rate
Homeowners with a variable-rate mortgage will see an immediate impact. Those with static mortgage payments will see more of their monthly payments going towards the principal and those with floating payments will see a corresponding drop in their payments.
Given that the rate cut was a conservative quarter of a percent, the drop in payments will be noticeable, but not exactly life-altering.
Impact on fixed mortgage rates
Fixed-rate mortgages are tied to the five-year government of Canada bond yield which means they’re indirectly affected by the BoC policy rate. The recent rate cut was already priced into bond markets, which have dropped nearly 40 basis points since the start of June. Lenders will slowly begin to adjust their fixed mortgage rates in the months ahead.
Those debating whether to go with a fixed or variable mortgage today will need to wager on how quickly the BoC is planning to cut the benchmark rate and by how much. Some experts suggest the central bank would need to cut by approximately 200 basis points within the next two years for homeowners to benefit with a variable rate right now.
What is the outlook for the housing market?
While the Bank of Canada rate cut does not correlate to a dramatic and immediate improvement in affordability for current homeowners or those waiting to get into the market, the rate cut is a positive step in the right direction. The psychological impact will boost confidence in the housing market for many Canadians.
And with anticipation for future cuts in the coming months, experts predict more and more sidelined buyers will step back into the market.
A hot summer market could be in store for Edmonton
The Edmonton market is showing a strong spring with an increase in total residential unit sales in the Greater Edmonton Area of 18.9% in May of 2024 compared to the previous year. Total residential average prices in May came in at $441,350, which is a 2.2% increase compared to April and a 5.0% increase compared to May 2023.
Depending how much of a confident boost the interest rate cut has on buyers, a strong spring could turn into a hot summer in the Edmonton housing market. Melanie Boles, REALTORS® Association of Edmonton 2024 Board Chair explains:
“It also appears that current interest rates haven’t put a dent in buying activity this year, with more than 500 additional sales closing this month compared to May 2023. We could potentially be in for an even busier June, as the next Bank of Canada interest rate announcement on June 5th might spark more activity in the market.”
The coming months will reveal the full impact of the Bank of Canada interest rate cut but, for now, it presents an important shift in a positive direction. Homeowners and potential buyers are finally more hopeful that mortgage rates will start to ease up in a meaningful way.
Have questions about buying a home in Edmonton? Wally Fakhreddine is an award-winning real estate agent who has helped hundreds of homeowners navigate buying or selling a home.
Call/text Wally at 780.238.7384 to get started today.