Interest rate cut: How does it affect B.C. mortgages, housing costs?

Bank of Canada's third consecutive cut means the key interest rate now stands at 4.25 per cent, down from the previous 4.5 per cent

Published Sep 05, 2024  •  Last updated 0 minutes ago  •  5 minute read

the Bank of Canada announced a third consecutive rate cut Wednesday. Houses and townhouses are seen in an aerial view in 2018. Photo by DARRYL DYCK /THE CANADIAN PRESS

It’s unclear if — or when — interest-rate cuts will drive up house sales and prices in Metro Vancouver, say observers.

As the Bank of Canada announced a third consecutive rate cut Wednesday — bringing the key interest rate to 4.25 per cent — B.C. realtors were reporting a sharp drop in summer home sales. In Metro Vancouver, August sales were down 26 per cent from the 10-year seasonal average, and 30 per cent in the Fraser Valley, according to regional real estate boards.

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“It will be interesting to see if this is the cut that raises the dial on buyer demand,” said Penelope Graham, mortgage expert with Ratehub.ca.

She said the cumulative 75-basis-point reduction could have more buyers return to the market, while others wait for interest rates to fall further.

But the rate cut will provide relief to homeowners with existing mortgages, said Rebecca Casey, president of the Canadian Mortgage Brokers Association of B.C.

She said the rate reductions have created “a lot more options” for people whose mortgages are up for renewal, as well as those ready to enter the market for the first time.

What does this mean for variable mortgage rates?

Casey said the expectation of future rate cuts is prompting more people to choose variable rate mortgages.

Wednesday’s cut will bring immediate relief for those whose payments fluctuate with interest rates.

Casey said the rate reduction adds up to about $15 per $100,000 borrowed per month. On a typical mortgage, that’s about $120 less, or as one of her clients remarked, “a tank of diesel” a month.

According to Ratehub.ca’s mortgage payment calculator, a homeowner with a 10 per cent down payment on a $962,537 home — with a five-year variable rate of 5.55 per cent amortized over 25 years — will pay about $130 less per month, or $1,560 less per year.

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“It’s not huge, but for people who are feeling the pinch, it will be welcome relief,” said Casey.

Tom Davidoff, an economics professor at the University of B.C.’s Sauder School of Business, said he doesn’t see prices ticking up yet, meaning more people can meet the mortgage stress test as interest rates go down. Photo by Francis Georgian /PNG

How does this affect mortgage renewals?

B.C. mortgage brokers continue to field calls from homeowners worried about their renewals, said Casey.

Those whose current mortgage rate “starts with a one or a two” continue to face a doubling of their interest rate, although it will be slightly less after the rate reduction.

She said the cut gives those people more options as they can decide to extend their amortization period, or opt for a variable rate mortgage. She’s noticed an increase in two- or three-year fixed mortgages, instead of the typical five.

Graham said the cut was already “well baked in” to the current fixed rate. But the signs are strong for further downward pressure on fixed rates “as North American rate cut sentiment strengthens.”

An interest rate cut can help first-time buyers qualify for mortgages.A 25 basis point cut could qualify them for $20,000 more in a mortgage. Photo by JONATHAN HAYWARD /THE CANADIAN PRESS

Will this help more first-time buyers?

In the short term, an interest rate cut can help more first-time buyers qualify for mortgages.

A 25 basis point cut could qualify them for $20,000 more in a mortgage, said Casey.

While that isn’t enough to go from buying a condo to a townhouse, it might help in acquiring more square footage.

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The fear is that as interest rates decrease, demand for housing — and prices — will rise, making it difficult for first-time buyers to enter the market.

Tom Davidoff, an economics professor at the University of B.C.’s Sauder School of Business, said he doesn’t see prices ticking up yet, meaning more people can meet the mortgage stress test as interest rates go down.

With Vancouver’s sky-high real estate prices, most people will continue to be unable to “get over that hump,” with the rate cuts likely to help those who can already afford a home in the city, or are very close, he said.

What does this mean for housing prices?

Interest rate cuts and housing prices don’t necessarily track together, but as interest rates come down, demand and prices may rise.

Bank of Canada governor Tiff Macklem said it was “reasonable” to expect future rate reductions if inflation continues to decline, but didn’t commit to a timeline, signalling a willingness to cut rates faster or slower depending on the economy.

Graham said cuts could come in October and December, possibly bringing the key rate to 3.75 per cent by the end of the year. The most bullish forecasts predict another four reductions in 2025, down to 2.75 per cent. But that’s far from certain.

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“Given there’s strong anticipation of further cuts to come, many buyers may (stay out of the market) a little longer, especially as many of Canada’s housing markets remain very well supplied, and favourable toward buyers,” she said.

House sales typically increase in fall, said Andrew Lis, Greater Vancouver Realtor’s director of economics and data analytics. Falling interest rates could give them a little push.

“With the Bank of Canada’s decision to reduce the policy rate today by another quarter percentage point, and with September being a month that typically sees an increase in sales from a seasonal perspective, the fall market is set up to bring more buyers off the sidelines,” he said.

What about the bigger picture?

Casey said the influence of Wednesday’s rate cut will flow to the prime lending rate, with cuts affecting car loans, credit card rates and other debts. That may help to ease financial pressures due to inflation.

Cumulative cuts could also have longer-term effects.

Davidoff said decreasing rates will eventually make the market favourable to housing development.

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If more people are able to buy homes, it could also take some pressure off the rental market, he said.

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