The Bank of Canada’s jumbo 50-basis-point cut on Wednesday has provided instant relief for variable-rate mortgage holders, and with bond yields dropping slightly fixed-rate mortgages are also expected to fall.
With its fifth consecutive interest rate cut, the Bank of Canada reduced its policy interest rate to 3.25 per cent in a bid to support economic growth, after November’s worrisome employment figures.
“The rate cut is good news for current variable-rate mortgage holders,” said Leak Zlatkin, licensed mortgage broker and LowestRates.ca expert.
“They’ll see an immediate decrease in their monthly payments, providing some relief amidst the rising cost of living. This also frees up some cash flow, which can be used for other financial goals, like paying down debt or increasing savings.”
Variable-rate mortgages are tied to interest rate changes by the Bank of Canada, moving up or down in step with the central bank.
A decrease of 50 basis points will lower the current prime rate at most lenders from 5.95 per cent to 5.45 per cent, said Zlatkin. The prime rate is the lending rate banks and financial institutions use to set interest rates for loans such as mortgages.
Variable-rate mortgages are tied to the prime rate and current variable rates are available at a discount of prime minus 1.05 per cent for insured mortgages and 0.8 per cent for uninsured mortgages. At the lowest end variable rates will go down to 4.4 per cent and 4.65 per cent.
In Toronto, the average home price of $1.1 million with a variable rate before the latest cut of 5.05 per cent would cost a homeowner a monthly mortgage payment of $5,171 — assuming 20 per cent down payment and 25-year amortization. With the new variable rate of 4.65 per cent, monthly payments become $4,971 — a decrease of $200.
Meanwhile, most fixed-rate mortgages are tied to the five-year bond yield, meaning when the bond yield goes up so does the interest on fixed-rate mortgages. When inflation rises or falls, bond yields tend to follow suit.
The bond markets factor in central bank rate cuts, resulting in bond yields dropping slightly on Wednesday, to the 2.8 per cent range, which could put downward pressure on fixed-rate mortgages, said Penelope Graham, mortgage expert at Ratehub.ca.
Currently, the lowest five-year fixed mortgage for an insured borrower with a nonbank lender is 4.14 per cent, Graham said. And the lowest five-year fixed rate with the big banks is CIBC at 4.59 per cent.
In the coming days and weeks, consumers could potentially see the five-year fixed rate hit four per cent and even 3.99 per cent, as lenders post competitive rates for customers shopping around.
“Mortgage wars will heat up as there’s a lot of business up for grabs with renewals and first-time buyers and move-up buyers entering the market,” she said.
However, the dip in bond yields may be short-lived with the U.S. inflation numbers creeping up to 2.7 per cent, leading to a more conservative rate cutting path for the U.S. Federal Reserve. Uncertainty around U.S. politics with the threat of 25 per cent tariffs make it difficult to forecast the direction of the bond market, mortgage brokers say.
There was a 70-basis-point run-up with five-year bonds for several weeks after Trump’s election win and tariff announcement, but bond yields retracted around 35 basis points last week, said mortgage broker Ron Butler.
“There’s a lot of (market) volatility with the Trump effect,” he said. “But with more Bank of Canada rate cuts expected, which are factored into the bond market, there will be lower interest on fixed-rate mortgages come the new year.”
