On September 4th, 2024, the Bank of Canada made another significant move by dropping the interest rate, continuing a downward trend that began over 12 weeks ago. This latest rate cut brings the retail prime rate down from 6.7% to 6.45%, providing much-needed relief for homeowners with variable rate mortgages. In this post, we’ll break down what this means for you, your mortgage, and what we can expect in the coming months.

Another Interest Rate Drop: What Happened?

The Bank of Canada’s decision today to drop the interest rate by 0.25% follows speculation that a larger rate drop could be coming, similar to previous oversized drops seen during the 2008 economic crisis and the COVID-19 pandemic. However, the Bank followed the more traditional path of a quarter percent reduction.

Today’s rate drop reduces the prime rate – the rate used for most variable interest rate mortgages – to 6.45%, from the previous 6.7%. While we’ve already seen some downward pressure on fixed interest rates, this latest change may help push them even lower, though most of that movement has likely already happened.

Why Did the Bank of Canada Drop Rates Again?

According to Josh Tagg, one of our mortgage experts, today’s rate drop was prompted by several economic indicators:

• Inflation, while still a concern, has been coming down. Excluding shelter-related costs like rent and mortgage interest, inflation is actually below the Bank of Canada’s target, sitting at around 1.8%, similar to 2019 levels.
• GDP growth, though positive, is lagging behind population growth. Over the past five quarters, per capita economic growth has actually been negative, which is leading to reduced retail spending and economic activity.
• Unemployment remains elevated in several regions, including Alberta, where the rate stands at 7.1%, higher than the national average of 6.7%.

What Does This Mean for Your Mortgage?

If you have a variable rate mortgage, today’s interest rate drop will have an immediate impact. For every $100,000 of mortgage balance, this 0.25% drop translates to a $15 per month reduction in your mortgage payment. Over the past several months of rate cuts, this could add up to $177 per month in savings for a typical $400,000 mortgage.

This is a significant reduction in monthly payments, especially for homeowners who have been struggling with higher interest rates since they began to rise post-COVID.

Fixed vs. Variable Rates: What Should You Choose?

As of now, fixed mortgage rates are still lower than variable rates, but that may not always be the case. Currently, three-year fixed rates are hovering around 4.8%, while five-year fixed rates are just above 4.5%. On the other hand, variable rates are still around 5.5%, even after today’s rate drop.

If you’re deciding between a fixed or variable mortgage, here are some things to consider:

• Variable Rate Strategy: If you opt for a variable rate, you’re betting that interest rates will continue to drop over the next year. Many economists, including Josh Tagg, expect more than a 1% drop over the next 12 months, which could make a variable rate more attractive in the long run.
• Fixed Rate Strategy: Locking in a fixed rate now offers stability, especially if you believe rates may not drop as much as predicted. A fixed rate protects you from future rate increases, though you may miss out on potential savings if variable rates drop significantly.
• Hybrid Strategy: Some homeowners may start with a variable rate and switch to a fixed rate later, depending on how the rates evolve. This can offer some flexibility in the short term while giving you the option to lock in at a favorable fixed rate when conditions are right.

What’s Next? Future Rate Predictions

Looking ahead, the Bank of Canada is expected to make two more rate announcements before the end of the year. Most analysts are predicting another 0.25% rate drop at each of those announcements, which would bring the prime rate down to 5.95% by the end of 2024.

By late 2025, some forecasts suggest that the Bank of Canada’s rate could drop even further, potentially to 2.5-3%. This would bring the prime rate down into the low 5% range, a much more comfortable level for many homeowners.

How Will This Impact You?

If you’re already in a variable rate mortgage, today’s drop and the expected future drops could mean significant savings over the next year. For those considering their options, now may be a good time to explore variable rate mortgages, especially if further rate cuts are on the horizon.

However, if stability and predictability are more important to you, locking in a fixed rate now may be the best move. Either way, we recommend reaching out to one of our mortgage experts to discuss your specific situation and get personalized advice.

Final Thoughts

The Bank of Canada’s latest rate drop is another step in its effort to stimulate the economy by making borrowing cheaper for Canadians. Whether you’re in a variable or fixed mortgage, it’s important to stay informed and consider how future rate changes will impact your financial decisions.

Keep in mind that while rate cuts provide relief for homeowners, economic conditions are still evolving. Inflation, unemployment, and GDP growth will all play a role in the Bank of Canada’s future decisions, and we’ll continue to provide updates as new information becomes available.

If you have any questions or need help navigating these changes, feel free to contact us. Our team is here to help you make the best decision for your mortgage and financial future.

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