Do the Bank of Canada Rate Changes Affect Mortgage Rates?
Here’s the thing—kind of.
There’s a lot of speculation about when the Bank of Canada might start lowering the overnight lending rate. And there’s even more speculation about how this will impact the housing industry. Let’s first break down how movement in the Bank of Canada rate might impact each type of mortgage rate.
Variable Rates
Variable rate mortgages trade at bank prime less a differential. Currently, the bank prime is 7.2%. A decrease in the Bank of Canada Rate (say of 0.25%) would mean that there is also very likely to be a decrease in bank prime the very next day to 6.95%. This would mean an overall decrease in variable interest rates.
So, yes, Variable Rates are directly affected by what happens with the Bank of Canada rate changes, but just a little bit.
Fixed Rates
Fixed rates on the other hand, are typically impacted most by the 5 year Government of Canada Bond Yield. Bond yields are influenced by a variety of factors, including the Canadian and US employment rates and economy. What really matters here is what the Bank of Canada says and how they say it at their announcements—because this will influence the movement of bond yields. This will directly affect fixed interest rates more than changes to the BoC rate.
The important takeaway here is that movement in the Bank of Canada rate does not necessarily equal a decrease in fixed mortgage rates. Home buyers should pay attention to what’s happening with bond yields, rather than the media headlines about what might happen at upcoming BoC announcements.
What Happens to the Housing Market When Mortgage Rates Decrease?
In Alberta, we’ve seen home prices increase almost 20% in some areas over the past few years. It’s been an absolutely wild time in real estate and a great opportunity for those with properties to grow equity very quickly.
But we are still seeing a lot of home buyers waiting for a rate drop or prices to decrease before they purchase a property. We’ll just go ahead and say it—that’s a terrible idea. Why? Because when rates go down, demand and competition for homes goes up, and this will very likely drive even more increases in housing prices. For buyers who don’t already own a home, this could prevent them from ever being able to get into the real estate market.
So, what can you do if you think prices will drop?
1) Enter the market with a Variable Rate
If you take a variable rate now and rates drop, you can benefit from a lower variable rate, or you might be able to lock in at the lower fixed rate.
2) Enter the market with a 6-month short term rate
A short term rate is often much higher, but with the benefit of being able to lock in at a lower rate if rates do drop in the next 6 months.
3) Enter the market with a 3 year term
A 3 year term might be a great option for those who think rates will drop, but at a steady pace. It ensures the ability to lock in a lower rate after 3 years if they do in fact go down, and also allows the purchaser to benefit from getting into the market at the current prices.
All of these options allow home buyers to still prepare for a situation where rates come down, but they also allow them to wait for that moment while building equity in a home. We believe you shouldn’t be waiting for what may come, because you might just miss out on the chance to build wealth now.
More questions? We’d love to chat. Reach out to our team.