For the first time in over four years, the Bank of Canada has delivered a highly anticipated rate cut! As I say in my book, the BoC has a consistent pattern: they have never hiked rates without coming through with a cut within the same 5 year period. The trend continues! 

We all knew rate cuts were on the horizon; it was just a matter of time. 

And this is just the beginning! 

If you’re currently in a variable rate mortgage, get ready to celebrate. The Bank of Canada is expected to roll out a series of rate cuts over the next couple of years, making it an exciting time for homeowners and buyers alike.

Here’s an excerpt from the announcement: 

“With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent date has increased our confidence that inflation will continue to move towards the 2% target.”

 

What Does This Mean for Those in Variable Rate Mortgages? 

If currently in a variable rate mortgage, your rate is expected to drop by 0.25%. The same applies to anyone with a HELOC (Home Equity Line of Credit). 

If you have a true variable rate mortgage, where the payment remains static for the term, the portion of your payment applied to interest will now decrease, while your principal portion increases, effectively reduces your amortization period. 

For those with an Adjustable-Rate Mortgage (ARM), your payment will decrease along with the rate. You can expect a payment drop of roughly $12 for every $100,000 you owe. Maybe not life changing, but again, this is just the beginning. 

 

What Does This Mean for Fixed Mortgage Rates? 

As I mention time and time again, the Bank of Canada announcements do not have a direct impact on fixed rates. There are several factors that influence fixed mortgage rate pricing, with bond yields being one of the largest contributors.  

When the BoC cuts their rate by 0.25% (or any margin), it does not mean that we will automatically see a 0.25% cut to fixed rates. There are even times when fixed mortgage rates can move in the opposite direction. Just two weeks ago, it was looking like this would happen again. Bond yields had been increasing fast, adding continual upward pressure on fixed mortgage rates. 

However, the upward trend has reversed, with yields dropping steeply since May 28th.  

While a rate cut on June 5th was possible, it was never a guarantee. We knew that a cut was coming soon, but it was still questionable as to whether it would be in June, or if the Bank would wait until their next scheduled announcement on July 24th. Following the cut, the bond market reacted, dropping by roughly 1.50% at the time of writing of this blog. 

The bond yields are now at their lowest point since late March.  At the time, fixed rates were not much different from where they are today. It’s still possible that we could see some lenders drop their fixed mortgage rates, however, it’s likely that we’ll need to see the bond yields continue to fall before we see any notable drops. 

 

Conclusion 

The beginning of the rate cuts has been a long day in the making. The Bank of Canada is just getting started and more cuts are expected before the end of this year. This is expected to continue into 2025 and 2026. I’ll be posting the updated forecasts from the big six banks in an upcoming blog. 

This was a happy day for anyone in a variable rate mortgage. 

You can read the full report from the June 5th rate announcement here.