What do lower rates mean to you and the market
It’s been 4 years since we’ve seen any interest rate reductions from the Bank of Canada and over 2 years since they embarked on a dramatic upswing in rates to help curb inflation. Lower inflation is certainly ideal, but higher interest rates have substantially increased housing costs for many Canadians, especially as many homeowners have upcoming mortgage renewals that will almost certainly be at much higher interest rates than they’ve enjoyed the last few years.
So, with a quarter-point rate reduction on June 5, 2024, what does this mean for the average Canadian? In reality, not much will change in terms of overall monthly housing expenses, but there will be some improvement. More notably, though, it’s a step in the right direction that should bring a sense of optimism for lower interest rates going forward.
While most Canadians are hoping for – and most economists are predicting – even lower rates with a series of gradual rate reductions over the next several months or so, let’s look at specifically what a quarter-point rate reduction equates to in a couple examples:
1. Mortgage of $400,000 at 6.0% for 5 years and a 25-year amortization period = $2,559/month
- If that interest rate is reduced by 0.25% to 5.75%, the payment = $2,500/month
- That equates to a monthly savings of $59
2. Mortgage of $650,000 at 6.0% for 5 years and a 25-year amortization period = $4,159/month
- If that interest rate is reduced by 0.25% to 5.75%, the payment = $4,063/month
- That equates to a monthly savings of $96
While these aren’t huge savings with just one quarter-point rate improvement, adding several successive rate improvements together will clearly have a healthy impact on one’s monthly finances.
As mentioned, the bigger story here is the optimism that a rate reduction sends to the market. Currently, there are many buyers concerned about finances and who want to see tangible rate improvements before pulling the trigger on a purchase. This has lead higher inventory and softer sale prices. As it is common to see increased market activity and rising prices when rates come down, the latest rate improvement could compel some buyers to jump back into the
market believing they may find a good deal. As such activity increases, sellers may soon see stronger sale prices; though, I believe it’s unlikely that we’ll see dramatic price increases in the short term.
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If you have questions about what your home may be worth in the current market, or if you’re considering a purchase, please reach out to discuss your real estate plans, market conditions including interest rates, and we can best achieve your goals.