How would a Bank of Canada cut change Canada's mortgage outlook?

Speculation is growing that the central bank could lower rates in June

How would a Bank of Canada cut change Canada's mortgage outlook?

Expectations are rising that the Bank of Canada will introduce its first interest rate cut for over four years this summer as inflation continues to cool and the national labour market begins to soften.

The central bank last lowered its policy interest rate at the end of March 2020, slashing to a rock-bottom 0.25% as the full likely impact of the COVID-19 pandemic on Canada’s economy and labour outlook became clear.

That rate remained resolutely low for almost two years, before surging inflation sparked a flurry of hikes throughout 2022 and 2023 – seeing the Bank settle at the current level of 5.0%, its highest level for 23 years.

Six consecutive rate decisions by the central bank have seen the overnight rate remain unchanged. Yet with this week’s Statistics Canada report showing inflation dipped to its lowest level for three years in April, many observers now believe the Bank has been given a green light to cut rates in its next announcement, scheduled for June 5.

That decision would mark welcome news for homeowners across the country on variable-rate mortgages, particularly those with adjustable payments who’ve seen borrowing costs spike since 2022 thanks to the Bank of Canada’s aggressive rate-hiking path.

It could also convince some would-be homebuyers to step off the sidelines and resume their purchasing plans – although one Toronto-based mortgage broker is cautioning against expecting the overall outlook for owners or buyers to change dramatically after a possible summer rate cut.

Victor Tran (pictured top), mortgage and real estate expert with RATESDOTCA, told Canadian Mortgage Professional that with the central bank’s first move likely to be a cautious quarter-point cut, there was still some way to go to shift the landscape significantly where the market is concerned.

“Twenty-five (25) basis points is really not a whole lot, and even half a percent is still not a whole lot,” he said. “I mean, that brings us down [by] the very minimal savings per month. And sure, there could be an increase in demand for housing – but not enough to see the activity that we saw back in 2021 and 2022.”

Affordability challenges likely to persist for many buyers

What’s more: national average home prices may have declined slightly in 2023, ending a run of year-over-year increases – but they’ve increased hugely over the past five to six years, according to Statista.

Average prices across the country came in at $488,862 in 2018, but have since surged to $678,282, a jump of nearly 39%. For Tran, eyewatering home prices mean the impact of a small rate cut by the Bank of Canada is likely to be minimal for many buyers. “With these hyper-high housing prices, it’s not going to save them that much more in the end,” he said.

Upcoming renewal wave contributing to uncertain outlook

Canada’s banking regulator sounded the alarm this week on the risks posed to the national financial system by mortgage lending, particularly with a wave of renewals set to arrive in 2025 and 2026.

Those are significant because many of the borrowers who took out ultra-cheap mortgages at the height of the pandemic will be coming up for renewal in those years – most at much higher rates than when they originally signed, even if the Bank lowers rates a few times as expected.

The Office of the Superintendent of Financial Institutions (OSFI) said in its latest risk outlook that 76% of mortgages outstanding as of February are due for renewal by the end of 2026, increasing the risk of “payment shock” for borrowers – especially those whose mortgage originated between 2020 and 2022.

That’s part of the reason some buyers may be hesitant about jumping into the market even if the Bank of Canada decides to cut rates over the summer, according to Tran.

“You always hear in the news how affordability can be a major issue for those people coming up for renewal,” he said. “Are they going to be able to manage the payments when they renew into these higher rates, rates that are double or even close to triple than what they signed for back in 2020 and 2021?

“There’s speculation that if they can’t afford those higher rates – will we see an influx of supply coming into the market? Will we see people selling more, or foreclosures, or whatever it is? So that kind of plays into why some buyers are hesitant as well, especially the buyers that are not in a rush to get into the market. They may just wait it out to see what it’s going to be like next year.”

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