BoC is adding a third emergency rate cut, bringing it to 0.25%. See how it can affect home buyers and sellers.
In a bold move on Wednesday (March 4, 2020), the Bank of Canada slashed its key interest rate by 50 basis points to 1.25%, in an attempt to keep the economy moving. But it didn’t stop there. On March 13, 2020, the BoC announced it will cut its overnight rate target by half a percentage point to 0.75%. And surprisingly enough, today (March 27, 2020) the Bank of Canada announced a new cut by 50 basis points in a press release, bringing it to 0.25%. It cited COVID-19 as the primary reason for its decision.
This is the third time the Bank of Canada decides to cut its rate in a matter of a few weeks, as an attempt to help Canada's economy during the COVID-19 crisis.
Although winter weather, the rail blockades, and the political climate have also played a role in the first drop. This time, lower oil prices are weighing heavy and contributed to the decision. The Central Bank said the unscheduled rate cut was due to the pandemic and its impact on the economy.
As the country braces for economic impact, the Bank of Canada is attempting to curb anxiety and ease the concern of a possible recession.
In an interview with BNNBloomberg, the Chief Economist with Manulife Investment Management Frances Donald says, “We are living through history that will end up in textbooks and case studies as we analyze central bank policy, how effective it is, how quickly central banks should be reacting, and whether or not we look back and say: ‘They acted too late,’ ‘too early,’ or ‘right on time.’ This is a very strong message from the Bank of Canada. They are concerned about downside risks. But, I suspect that this is in conjunction with globally-coordinated rate cuts.”
What does all this mean for the real estate market? Here is what we know.
Savings for Home Buyers
The cut could mean significant savings for home buyers. The lower rate will potentially translate into lower mortgage rates.
"According to Ratehub.ca’s mortgage payment calculator, a homeowner who put a 10% down payment on a $500,000* home with a 5-year variable rate of 2.60% amortized over 25 years (total mortgage amount of: $ 463,950) has a monthly mortgage payment of $2,102."
Banks may choose not to pass on the additional savings because it means more profit for them. However, the BoC is hoping the major banks will cut their prime lending rates.
Stimulate the Real Estate Market
Lower rates could stimulate the real estate market in slower growth areas like Newfoundland and the Prairies.
This interest rate drop might create a further imbalance in the Victoria, Toronto, Southern Ontario, Ottawa, and Montreal markets that are already facing hotter markets. Homes are in shorter supply, creating more demand and increased pricing. Economists say this is short term pain for the long term good of the economy and will help keep us out of a recession.
Home prices may start to rise. As buyers are increasing the amounts they can borrow, supply might begin to drop, driving home prices up. Something to watch!
Economists are predicting the international markets will slow due to the global impact of COVID-19. Why is this important? There is an anticipated slowing of the global economy, which will impact foreign investments and the supply chain in Canada.
As explained by the Educators Financial group, if you have a mortgage already, how much – and when –you’ll feel the impact of the rate decrease will depend on whether your mortgage is variable or fixed rate, open or closed.*
If you have a variable rate mortgage, the amount of interest is contingent on the overnight rate. Financial institutions pass on any decrease in the rate to consumers almost immediately.*
If you have a fixed-rate mortgage, nothing will change until the fixed term ends, and it’s time to renew. *
With new changes were suspended until further notice, but they would be coming to the Mortgage Stress test in April, and it would be interesting to see how the Bank of Canada rate drop might impact the qualifying rate in case they stay like this once the new stress test does come into effect.
Under the new stress test, the rate will be the weekly median five-year fixed insured mortgage rate plus 2%. A few percentage points can translate into thousands of dollars in savings for the borrower.
Overall, it’s a great time to cash in on a lower mortgage rate if you were on the fence about purchasing. It is also a great time to sell, supply may drive housing prices up in some areas. Consult with your real estate professional for a complete view of market conditions in your area.
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