What the Bank of Canada rate cut means for mortgages, loans and investments (2024)

FAQs

What the Bank of Canada rate cut means for mortgages, loans and investments? ›

Bottom line: If your lender's prime rate decreases in response to the BoC's interest rate cut, as a variable rate mortgage holder you will benefit in one of two ways: Either your regular mortgage payment will decrease, or more of your mortgage payment will be directed toward your mortgage principal, meaning you could ...

In most cases, the overnight rate set by the BoC has the biggest effect on variable rate mortgages. When the BoC increases the overnight rate, variable rate mortgages become more expensive. Conversely when the BoC decreases the rate, carrying a variable rate mortgage becomes less expensive.

What Is the Mortgage Rate Forecast For Canada in 2024? (Updated June 2024) The mortgage rate forecast for Canada is for rate decreases to continue this year. The Big 6 Banks all agree in their predictions that we may see rates come down this year by as much as 75 to 100 basis points.

Central banks cut interest rates when the economy slows down in order to reinvigorate economic activity and growth. Rates go up when the economy is hot. The goal of cutting rates is to reduce the cost of borrowing so that people and companies are more willing to invest and spend.

Potential Rate Decreases

Many financial institutions and economists predict interest rates could start to decrease in mid-2024, ranging from a 0.25% drop to a total decrease of 1.00% by year-end. The Bank of Canada's next announcement on June 5th, 2024, could be a turning point.

While rates may not rise as much as tracker rate mortgages, lenders will likely pass on an interest rate rise onto their customers. This means your payments could increase as soon as your next payment. Your mortgage lender should send you a letter explaining the new rate and what you can expect to pay.

In summary, it is unlikely that mortgage rates in the US will ever reach 3% again, at least not in the foreseeable future.

This represents a full 1% drop off the variable mortgage rate projected out 1 year, into 2025. From here, rates are forecast to drop another approximately 1% in 2025-2026 to hit the neutral rate range.

What are the benefits of interest rate cuts? ›

The Fed lowers interest rates in order to stimulate economic growth, as lower financing costs can encourage borrowing and investing. However, when rates are too low, they can spur excessive growth and subsequent inflation, reducing purchasing power and undermining the sustainability of the economic expansion.

The Fed is now expecting a December 2024 federal-funds rate of 5.1%, implying one 0.25% cut from current levels. By contrast, in March the Fed called for a 4.6% rate, implying three rate cuts.

Because fixed-rate mortgages have the interest rate locked in, anyone looking to buy or refinance will benefit from the sustained lower rates. This is true for all fixed-rate financial products, including personal loans and car loans.

A stocks and shares Isa is likely to be most suitable. That is unless you will turn 55 within 30 years, in which case a pension might be a better tax wrapper for you. If you're unsure about the time horizon, you could invest in both a pension and a stocks and shares Isa.

Junk Bonds

Junk bonds are high-yield corporate bonds issued by companies with lower credit ratings. Because of their higher risk of default, they offer higher interest rates, potentially providing returns over 10%. During economic growth periods, the risk of default decreases, making junk bonds particularly attractive.

How Much Difference Does 1% Make On A Mortgage Rate? The short answer: It can produce thousands or even potentially tens of thousands in savings in any given year, depending on the purchase price of your property, your overall mortgage rate, and the total amount of the mortgage being financed.

A bank's prime rate is based on the Bank of Canada's overnight rate, also referred to as the policy interest rate. The overnight policy changes impact the prime rate, further affecting the interest rates of financial products, regardless of the type of interest tied to them.

Homeowners with variable rate mortgages with fixed monthly payments will see the most significant increases. The steepest rise is projected for 2026, with median monthly payments increasing by more than 60 percent. For 2025, the increase is over 50 percent, and this year, about 30 percent.