Written by Clay Jarvis, nerdwallet.com
The Bank of Canada’s aggressive December rate cut should add fuel to Canada’s re-ignited housing market.
The Bank of Canada handed down another aggressive interest rate decision today, shearing 50 basis points from both the overnight lending rate and the country’s variable mortgage rates.
Not long ago, these supersized cuts were seen as risky. Enticing home buyers with lower borrowing costs threatened to inflame the housing market and drive inflation higher. With GDP struggling and dark clouds looming over the economy, jolting the housing market might be the Bank’s only way of generating some immediate economic traction.
October’s rate cut, also a 50-pointer, invigorated housing markets across the country, with sales in Vancouver, Montreal and Toronto all notching significant annual gains. Today’s cut is a little different, though, as it comes days before two potentially disruptive new mortgage rules come into effect.
The combined impact of lower rates and less stringent lending guidelines could be a game-changer — for some buyers, anyway.
What does the December rate cut mean for mortgages?
Once the Bank’s decision is absorbed by the country’s lenders, variable mortgage rates will fall by 0.5%. By this time tomorrow, brokers’ lowest advertised variable rates should be around 4.3%. They’ll be considerably higher at Big Six banks.
In terms of improving mortgage affordability, a 0.5% rate reduction won’t move the needle for most buyers. The difference between how much home you can afford at 5% and 4.5% might be around $30,000, depending on your income and the size of your down payment.
If you’re a homeowner paying off a variable-rate mortgage, you’ll get some relief from today’s rate cut. On a $400,000 mortgage with a 25-year amortization, your monthly payment should drop by at least $100 — and that’s on top of the savings generated by the Bank’s previous four cuts this year.
How will the BoC’s rate cut affect home prices?
It might not be realistic to expect the same sales bump from the December rate cut that October’s created in November.
While both cuts were equally significant, Christmas is a-coming, which brings with it multiple days of downtime for buyers, sellers, real estate agents and mortgage professionals. The market will be far busier than it was last December, but it might struggle to compete with November 2024 in terms of sales increases.
Price appreciation over the next several weeks should be minimal. Between rising inventory in major markets and holiday commitments, bidding wars should be kept to a minimum. Price increases following the Bank’s October rate cut were generally modest. The benchmark sale price in Calgary, for example, was up 3.5% year-over-year in November. The average price in Toronto grew by only 2.6%.
That doesn’t mean you should sit back and wait for January before moving on a home purchase. The market’s only going to get busier, so consider dedicating a few hours of your holiday to squeezing in a mortgage pre-approval.
December 15: When rates and rules collide
Parsing the effect the Bank of Canada’s latest decision will have on winter home sales could be tricky, as it comes only days before new mortgage rules intended to improve affordability kick in.
On December 15, 2024, the insured mortgage limit will increase from $1 million to $1.5 million, while 30-year amortizations will be available for first-time and pre-construction home purchases. The former will create smaller down payment requirements for expensive properties, the latter will lower short-term mortgage costs for eligible buyers.
These new rules will make buying a home more attainable, but not necessarily more affordable.
Buyers might be able to get into a million-dollar house with a $75,000 down payment (instead of the $200,000 currently required), but only high-earning households will qualify for the resulting mortgages. Longer amortizations will shrink mortgage payments and make qualifying easier, but they’ll also generate tens of thousands of dollars in additional interest costs.
On their own, these rules would likely have a modest impact on the winter housing market. Million-dollar-plus properties aren’t common in most markets; slightly lower mortgage payments won’t be enough to get all first-timers over the finish line.
But combine them with five rate cuts and whatever further reductions the Bank has in store for early 2025 and the winter market looks set to be busier than it’s been in years.
