The three consecutive reductions in the key rate, the last of which was announced on Wednesday by the Bank of Canada, have enabled many citizens to get their heads above water financially or to access property.
The Governor of the Bank of Canada himself acknowledged that Canadians have felt the impact of the dramatic increase in interest rates over the past two years. They have tightened their belts. “Canadian household debt is high, which is one of the reasons why interest rates have had a significant impact,” he said at a press conference.
Wednesday’s announcement is therefore a breath of fresh air, according to Alexandre Bélanger, district manager – mobile mortgage specialists at TD Bank. Decreases are expected for mortgages, auto loans and personal loans. “This has repercussions in several areas of the economy. It will also be good for all SMEs that need financing,” he said.
“The first winners are the holders of variable-rate mortgages,” Mr. Bélanger emphasizes, however. He points out that this is the case for approximately one third of mortgage holders.
“Most lenders will pass the reduction on to them or increase the amount allocated to principal in monthly payments,” he said. He calculated that a 25-percentage-point reduction represents a savings of about $50 per month on a $400,000 mortgage.
Economist and columnist Francis Gosselin is one of those homeowners who was immediately affected by the fluctuations in the key rate. “We bought the house just as rates were starting to rise. Although I follow this closely professionally, I didn’t anticipate that it would reach 5%,” he said. “It went up very quickly, the amounts [des paiements] have increased by about 50% since we bought the house.”
He describes the situation, which arose just as he and his partner had a baby, as “painful.” “We withdrew part of our savings,” he said.
Payments have gradually decreased with each rate cut, the first of which was last June. The difference is still minimal, but it is encouraging for Mr. Gosselin, since several other rate cuts are expected.
Mortgages to be renewed
Moreover, the economist is part of another group of owners on whom the impact of the key rate is significant: those who must renew a fixed-rate mortgage. Indeed, the five-year term is coming to an end for Mr. Gosselin’s cottage.
The challenge now is to negotiate with your financial institution and sign an agreement at the right time, since the offers become more attractive with each drop in the key rate. In any case, your payments will increase, since rates have not returned to the historically low levels of 2019.
“You have to shop around,” says Mr. Gosselin, also recommending using a real estate broker, who can hunt for the best rates for his clients.
Alexandre Bélanger, for his part, suggests that people who have to renew their mortgages start shopping around four to six months before the deadline. “You can reserve a rate four months in advance and if they continue to go down, the client will be able to benefit from the best rate,” he explained. “It also allows you to start planning your budget, because consumers who signed in 2020 and 2021 are still going to be in for a shock.”
Energy in the real estate market
A licensed real estate broker at Royal LePage, Marc Lefrçois sees renewed energy in the real estate market.
“In very trendy neighbourhoods in Montreal, like Verdun, Villeray or the Plateau, we see up to 20% of transactions in multiple offers,” he observes. At the height of interest rates, almost no sales were concluded in bidding wars, recalls Mr. Lefrançois, who believes that this activity will move to other neighbourhoods as rates drop. He predicts a very busy fall for real estate brokers.
Mr. Lefrançois believes that the variable rate will be more profitable in the long term, but that buyers must ensure, if they choose this formula, that they are able to survive financially if rates were to rise.