Shift in Bank of Canada's decision impacts the balance between fixed and adjustable mortgage rates
The Bank of Canada has made a significant move by lowering its policy rate to 2.5%, marking the first reduction since March. This decision has put downward pressure on the bond yields that determine fixed mortgage rates, potentially leading to a shift in the mortgage market.
According to CIBC senior economist Andrew Grantham, another 0.25 percentage point cut is expected in October, following the Bank's latest decision. If lenders pass on the full cut, the lowest variable mortgage rates for a five-year term could drop from 3.95% to 3.70%.
For homeowners with an average priced home, this could mean a monthly savings of $84 if the variable mortgage rate on their $624,277 mortgage goes from 3.95% to 3.70%, due to the latest Bank of Canada decision.
However, the decision between fixed and variable mortgage rates depends on individual risk tolerance. The economy is losing resilience, and inflation will continue to be contained by the elevated unemployment rate and removal of retaliatory tariffs.
Governor Tiff Macklem stated that the risks have shifted since July, including a worsening labour market and sharp drop in exports. This could indicate a potential need for further mortgage rate cuts.
The U.S. Federal Reserve is set to release its own rate decision on Wednesday afternoon. If the Fed's commentary is dovish, bond yields could fall further, potentially leading to additional fixed mortgage rate cuts.
Penelope Graham, mortgage expert at Ratehub.ca, suggests that for someone attracted to variable mortgage rates, there could be more rate cuts to come this fall. Major Canadian banks, including RBC, TD, Scotiabank, BMO, and CIBC, have announced changes to variable mortgage rates, with these changes expected to occur primarily throughout late 2024 and into 2025.
It's important to note that there is a spread of 24 basis points between the lowest variable and fixed mortgage rates. The lowest fixed mortgage rate currently stands at 3.94%.
In conclusion, the Bank of Canada's interest rate cut could provide a boost to variable mortgage rates, offering potential savings for homeowners. However, the decision between fixed and variable mortgage rates should be based on individual risk tolerance and the overall economic outlook.
