September Mortgage Market Update

As we look ahead to the possibility of further rate cuts by the Bank of Canada in late 2024 and into 2025, many homeowners, investors, and financial professionals are reflecting on how these changes might impact the Canadian economy and housing market. With ongoing concerns about inflation, fluctuating housing prices, and global economic pressures—especially from the United States—there’s much to consider.

This article will explore potential rate drops, how the U.S. economy influences Canadian decisions, and what homeowners renewing their mortgages or entering the market can expect. I’ll also provide a case study showing how changes in rates impact monthly payments for homeowners, emphasizing the value of professional mortgage advice, particularly around renewals and debt consolidation during uncertain times.

Although Canada’s economic policies are determined domestically, the U.S. economy plays a significant role in shaping those decisions. The United States is Canada’s largest trading partner, and its inflation trends, interest rate decisions, and overall economic health affect everything from our exports to the value of our dollar. Historically, when the U.S. Federal Reserve adjusts its rates, the Bank of Canada often follows to maintain balance.

Currently, the U.S. is managing inflation at a slower pace than before, and if their inflation levels ease in late 2024, it could lead to rate cuts by the Federal Reserve. This, in turn, could prompt the Bank of Canada to reduce rates to keep the Canadian economy competitive.

On the flip side, any downturn in the U.S. economy could lower demand for Canadian exports, decrease commodity prices, and affect the value of the Canadian dollar. In such scenarios, the Bank of Canada would likely reduce rates to stimulate the economy.

Fixed Rates on the Decline

Recently, fixed mortgage rates in Canada have started to drop, as the bond market anticipates future reductions in interest rates. With inflation appearing to cool, there is downward pressure on fixed rates, including the popular five-year fixed mortgage. As rates decline, more homeowners and buyers will find mortgages becoming more affordable, though how low they’ll go and how long they’ll stay favourable remains uncertain.

If the Bank of Canada reduces rates in 2024, we can expect fixed mortgage rates to decline even further, opening up opportunities for those looking to renew or buy. However, homeowners will need to remain vigilant, as rate changes can have a profound impact on long-term financial health.

To understand what rate reductions might bring, it’s helpful to look at past periods of significant rate drops and their impact on the housing market.

In 2008, the global financial crisis prompted sharp rate cuts by the Bank of Canada. While housing sales initially slumped due to economic uncertainty, by 2009 and 2010, the housing market rebounded strongly as lower borrowing costs made homeownership more accessible. A similar trend emerged in 2015 when the Bank of Canada cut rates in response to falling oil prices. Housing markets, particularly in Vancouver and Toronto, surged as lower rates fuelled demand, pushing home prices to unprecedented levels.

Looking ahead to 2024 and 2025, rate cuts could similarly drive demand, especially as many Canadian cities are already facing significant affordability issues. Reduced borrowing costs could help homeowners and buyers manage mortgage payments, but they may also further inflate home prices in highly competitive markets, presenting new challenges for affordability.

Case Study: Impact on Monthly Payments

To illustrate how rate changes impact mortgage payments, let’s look at a homeowner who purchased their home in 2019 at a 2.79% fixed rate, with a five-year term that’s set to renew in 2024. Their original mortgage was $400,000, and over the past five years, they’ve paid it down to $335,000.

Now, as they approach their renewal, they’re facing a rate of 4.89%. Under their original 2.79% rate, their monthly mortgage payment was approximately $1,827. At the new rate of 4.89%, their monthly payment would increase to around $2,181, representing an increase of $354 per month or $4,248 annually.

While this increase is substantial, it’s significantly better than what it would be if rates were higher, as we saw with earlier periods of high interest. Furthermore, if the Bank of Canada reduces rates in 2024, even a modest reduction of 0.5% could bring the renewal rate down to 4.39%, making the monthly payment approximately $2,092—a more manageable increase.

This case study shows just how important it is for homeowners to consult with a mortgage professional when facing renewal. Many homeowners might assume that they have to accept the first offer from their lender, but a broker can often help secure a more favorable rate or suggest strategies like refinancing or consolidating higher-interest debts into the mortgage. For those renewing in 2024, many will face the highest rates they’ve ever experienced, especially if they initially locked in during the low-rate period between 2016 and 2021. As seen in the case study, even small differences in renewal rates can add up to thousands of dollars over the course of a mortgage term.

A mortgage advisor can help evaluate if refinancing or debt consolidation makes sense, particularly as the cost of consumer debt continues to rise. High-interest credit card debt or personal loans can significantly strain a household budget, and consolidating these into a mortgage with a lower rate can free up cash flow while simplifying monthly payments.

Broader Impacts on the Canadian Housing Market

If the Bank of Canada continues to reduce rates in 2024, it’s likely that housing demand will increase, just as we’ve seen in previous periods of rate cuts. Lower borrowing costs attract both new buyers and investors, which can stimulate market activity.

However, the broader implications for the housing market remain to be seen. In many major cities, home prices have already skyrocketed, fuelled by years of low-interest rates and strong demand. A reduction in borrowing costs may help those with existing mortgages, but it could also push prices even higher, exacerbating affordability challenges for first-time buyers. We may also see increased competition in mid-sized and smaller cities as buyers seek out more affordable options.

One potential positive outcome is that as rates decline, those who previously held off on buying or selling due to high interest rates may re-enter the market. This increased activity could bring more balance to the housing market, providing more opportunities for both buyers and sellers.

What Homeowners and Buyers Should Expect

Looking forward to 2024 and 2025, homeowners and buyers alike should be prepared for potential interest rate reductions. While lower rates are generally good news for mortgage affordability, the broader impact on home prices and affordability remains uncertain.

For homeowners renewing their mortgages, speaking with a mortgage professional will be critical to ensuring the best financial outcome. Whether it’s securing a more competitive rate or considering debt consolidation, professional advice can make a significant difference in managing monthly payments.

In closing, while rate cuts by the Bank of Canada could provide relief for borrowers, the full impact on the Canadian economy and housing market will depend on a variety of factors, including the direction of U.S. monetary policy and domestic economic conditions. By staying informed and seeking expert guidance, Canadians can navigate these changes and make the most of whatever opportunities the future holds.

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-Paul S