On January 29, 2025, the Bank of Canada announced a 25 basis point reduction in its target for the overnight rate, bringing it to 3%. This decision marks the central bank's latest effort to stimulate economic growth amid ongoing uncertainties.
The overnight rate is a critical benchmark that influences various interest rates across the economy, including those for mortgages. A decrease in this rate often leads to lower borrowing costs for financial institutions, which can translate into reduced interest rates for consumers seeking loans and mortgages.
Impact on Mortgage Rates
For homeowners and potential buyers, this rate cut could result in more favorable mortgage terms:
Variable-Rate Mortgages: These mortgages are directly tied to the Bank of Canada's benchmark rate. As the overnight rate decreases, borrowers with variable-rate mortgages may see immediate reductions in their interest payments.
Fixed-Rate Mortgages: While not directly linked to the overnight rate, fixed mortgage rates are influenced by the broader economic environment and bond yields. The recent rate cut, along with the Bank's decision to end quantitative tightening and resume asset purchases in March, could lead to lower bond yields, potentially making fixed-rate mortgages more affordable.
Additional Mortgage Reforms
In conjunction with the rate reduction, new mortgage reforms have been introduced to enhance housing affordability:
Extended Amortization Periods: The introduction of 30-year amortizations for new builds aims to lower monthly payments, making homeownership more accessible.
Refinancing Options for Secondary Units: Homeowners now have more flexibility to refinance insured mortgages to add secondary units, such as accessory dwelling units (ADUs), laneway homes, or basement apartments, potentially increasing rental income and property value.
Fixed vs. Variable Mortgages: Which is Better Now?
With interest rates declining, borrowers must decide between a fixed or variable mortgage. Each option has distinct advantages depending on financial goals and risk tolerance:
Fixed-Rate Mortgages: These offer stability with predictable payments over the term of the loan. Fixed rates are ideal for borrowers who prefer certainty in their budgeting and want protection against potential future rate increases. While fixed rates tend to be higher than variable rates initially, they provide peace of mind in volatile markets.
Variable-Rate Mortgages: These typically start with lower interest rates than fixed mortgages, making them attractive when rates are expected to stay low. However, they are subject to market fluctuations, meaning monthly payments can increase if the Bank of Canada raises rates in the future. Variable rates suit borrowers who are comfortable with potential changes and want to take advantage of lower initial payments.
With interest rates declining, borrowers must decide between a fixed or variable mortgage. Each option has distinct advantages depending on financial goals and risk tolerance:
Fixed-Rate Mortgages: These offer stability with predictable payments over the term of the loan. Fixed rates are ideal for borrowers who prefer certainty in their budgeting and want protection against potential future rate increases. While fixed rates tend to be higher than variable rates initially, they provide peace of mind in volatile markets.
Variable-Rate Mortgages: These typically start with lower interest rates than fixed mortgages, making them attractive when rates are expected to stay low. However, they are subject to market fluctuations, meaning monthly payments can increase if the Bank of Canada raises rates in the future. Variable rates suit borrowers who are comfortable with potential changes and want to take advantage of lower initial payments.
What Homebuyers and Homeowners Should Do Next
With mortgage rates expected to decline, both prospective homebuyers and current homeowners should take strategic steps to maximize their financial position:
For Homebuyers:
Evaluate Affordability: Lower interest rates may make monthly mortgage payments more affordable, but home prices could rise due to increased demand. Ensure you calculate the full cost of homeownership, including taxes and maintenance.
Consider Pre-Approval: If you’re planning to buy, securing mortgage pre-approval can help lock in favorable terms and provide clarity on how much you can afford.
Compare Mortgage Options: With rates changing, assess whether a fixed or variable mortgage aligns better with your financial goals.
For Current Homeowners:
Assess Refinancing Options: If your mortgage rate is significantly higher than current offerings, refinancing may lower your monthly payments and overall interest costs.
Check Mortgage Renewal Terms: If your fixed-rate mortgage is set to renew soon, shop around to secure the best possible rate in a falling-rate environment.
Make Extra Payments Where Possible: If rates drop, consider using the savings to pay down your principal faster and reduce long-term interest costs.
Final Thoughts
The Bank of Canada's recent rate cut, coupled with new mortgage reforms, presents potential benefits for both current and prospective homeowners. However, it’s essential to remain informed, carefully evaluate financial decisions, and seek professional advice when necessary. By taking proactive steps, homebuyers and homeowners can make the most of the changing mortgage landscape.