This morning’s rate announcement from the Bank of Canada was music to the ears of anyone currently in a variable rate mortgage. They came through with another 0.25% cut, which means that we can expect mortgage lenders to drop their prime rate accordingly. 

The drop was what we were expecting. While it’s possible that the BoC could have waited until September to come through with the cut, the labour market continued to weaken, contributing to bringing inflation back to a downward trajectory in both Canada and the US. 

This was enough evidence for them to make the move. 

 

What the Cut Means for Fixed Mortgage Rates 

We often hear from clients who want to wait for a Bank of Canada announcement before locking in a fixed mortgage rate. However, it’s a common misconception that the Bank of Canada’s rate directly affects fixed mortgage rates. While a BoC rate cut might lead some to believe fixed rates will drop by the same margin, the reality is different.

Fixed mortgage rates are primarily influenced by bond yields, which operate independently of the central bank rate. There have been instances where the Bank of Canada raised its rate while bond yields fell, resulting in lower fixed mortgage rates, and vice versa.

 

Current Market Reactions 

A ‘surprise’ move from the Bank can send bond yields spiking in one direction or another, giving the illusion that fixed mortgage rates are moving with the Bank rate. But this morning’s announcement was not a surprise. It was widely expected by most economists… as well as by the bond market. If the bond market is expecting the move, then a cut from the Bank of Canada can have little to no impact on bond yields, which would mean little to no impact on fixed rate mortgages. 

 

Prior to the announcement, bond yields were down roughly 0.75% from the previous day. Following the announcement, the yields were down by roughly the same margin. Then later in the afternoon, the yields moved even with where they were yesterday.  In other words, there was no reaction or additional drops in the bond market following the news. The market was expecting the cut, therefore, nothing to report on fixed mortgage rates falling further… at least not yet. 

 

Further Rate Cuts Expected 

The good news doesn’t stop here. More rate cuts from the Bank of Canada are expected, with at least one or two more anticipated by the end of the year and more coming in 2025. I will provide updated forecasts from the major banks in an upcoming blog once the dust settles from this recent cut.

Fixed rates are also expected to fall, though not at the same pace as the Bank of Canada rate cuts.

 

Is Now the Time to Consider a Variable Rate Mortgage? 

As the prime rate continues to decrease, the gap between fixed and variable rates will narrow, making variable rate mortgages more attractive. However, even with the recent cut, variable rates are currently about 1.00% higher than comparable fixed rates. This means that choosing variable will put you in a losing position from the beginning. 

But if forecasts hold true, choosing a variable rate mortgage now could become your most cost-effective option. However, it’s important to consider that forecasts have been unpredictable over the past four years. Rates could drop more than expected or not as much as anticipated. It’s a risk that requires a strong stomach for potential fluctuations, which is why the majority still prefer fixed rates.

Variable rate mortgages will eventually regain popularity, but we’re not quite there yet. For more details, check out my recent blog on Variable Rate Mortgages in Today’s Market. 

 

Conclusion 

We’ve seen back-to-back rate cuts from the Bank of Canada, with more expected in the near future. As long as inflation continues to decline, so will the central bank’s rate. Stay tuned for further updates and how these changes might impact your mortgage options.

You can read the full report from the Bank of Canada here.