For months now, owners have been keeping a keen eye on the falling rate of inflation in the hope it would signal cheaper mortgage costs and boost the property market.
Now Canada’s inflation is 2.5%. It doesn’t mean anything is any cheaper, but it signals the fast pace of price rises, which most global economies suffered since Covid, is returning to normal levels.
We’ve already had two 0.25% interest rate cuts, and that’s taken the Bank of Canada’s official rate from 5% to 4.5%. But more is needed to entice owners to sell and give buyers a better chance of purchasing at today’s prices.
Our inflation rate has been under 3% since January. So, some forecasters think the central bank may consider a 0.5% cut to boost the economy and bring down the 6.4% unemployment rate.
Others say we are on the path for multiple cuts before Christmas, and each one will have a positive impact on the property market.
Here’s what happens when rates start falling:
- Quick Overview: When the central bank reduces interest rates, mortgage costs generally decrease, making it more affordable to borrow money to purchase a home.
- Market Boost: Lower mortgage costs can encourage more people to enter the housing market, leading to increased demand and potentially driving up property prices.
- Refinancing Benefits: Existing homeowners with variable-rate mortgages will see their interest rates decrease in line with the central bank’s cuts, lowering their monthly repayments. This can encourage owners to upgrade and sell their existing home, increasing the number of properties for sale.
- Lower mortgage costs: New borrowers can secure home loans with lower interest rates, resulting in reduced monthly mortgage payments. This can make homeownership more accessible and potentially enable buyers to afford more expensive properties.
- Fixed-rate players: Homeowners with fixed-rate mortgages may consider refinancing to take advantage of the lower rates, although they may incur break costs or fees for doing so.
But there are some variables:
- Type of mortgage: The effect will be more immediate for variable-rate mortgages compared with fixed-rate mortgages.
- Lender policies: Lenders may not always pass on the full rate cut to their customers.
- The Economy: The housing market and mortgage costs are also influenced by other economic factors, such as employment levels, wage growth and consumer confidence.