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How the Bank of Canada’s interest cut will affect mortgage rates

Economists say rates will dip slightly in response to the Bank of Canada’s surprise move Wednesday to cut its trend-setting interest rate to 0.75 per cent


 
(Adrian Wyld/The Canadian Press)

(Adrian Wyld/The Canadian Press)

TORONTO – Canadian homeowners have likely gained a reprieve from an expected increase in mortgage rates this year.

Economists say rates will dip slightly in response to the Bank of Canada’s surprise move Wednesday to cut its trend-setting interest rate to 0.75 per cent, from one per cent, to soften the blow of dropping oil prices on the Canadian economy.

“This signals that low interest rates will be with us a while longer,” said Avery Shenfeld, the chief economist at CIBC World Markets, noting that the central bank’s rate cut will likely mean a corresponding 0.25 drop in variable, or floating, mortgage rates.

Fixed-rate mortgages are also likely to see a slight decline, as they follow bond yields, which will move lower in response to the rate cut.

It was anticipated that the Bank of Canada would move to increase its overnight rate later this year due to an improving economy, until crude prices started to slide and dropped below US$50 a barrel.

Phil Soper, president of realtor Royal LePage, said Canadians could be shopping for cheaper mortgages within days.

“It doesn’t take long to react to a policy change like this,” Soper said. “That’s why it’s such a powerful tool.”

A conventional five-year mortgage stands at about 4.79 per cent, according to data from the Bank of Canada.

Related:
A recap of our live-chat with economic experts
John Geddes looks at the political ramifications of the cut

Decreased mortgage rates are likely to boost sales and prices of homes in Central Canada, including in Toronto’s red-hot property market, where Soper predicts prices could climb by 4.5 to five per cent this year.

“It will be a lift to the industry overall,” Soper said. “However, it will be particularly pronounced in Central Canada, which we believe will see a lift from lower oil prices regardless and, when you add to it the stimulative impact of lower mortgage rates, we should see an uptick in activity.”

However, the rate cut may also spur Canadians, who have been criticized previously by the Bank of Canada for holding record levels of debt, to borrow more money.

“Certainly this isn’t going to discourage anyone from taking on debt,” Shenfeld said.

“But I think in the Bank of Canada’s eyes right now, it’s a lesser of two evils. They’ve shown discomfort with the amount of borrowing Canadians have done, but the economy right now can’t afford to shut the tap off on that if we’re not getting the lift to growth from the energy sector.”

 

Although cheaper mortgage rates are likely to buoy real estate markets in Central and Atlantic Canada, TD economist Craig Alexander says the impact of oil prices will trump interest rates in Western Canada.

“I think it’s inevitable that you’re going to see a pullback in sales and a softening in price growth in real estate in oil-rich provinces because, at the end of the day, income growth in those provinces is going to be a lot less,” Alexander said.

“It is an economic shock, and real estate markets do reflect local economic conditions.”

In its latest report, Royal LePage predicted home prices in Calgary would grow by 2.4 per cent this year – a slowdown from the 5.5 per cent jump they made last year.

Meanwhile, older Canadians who rely on interest-bearing investments for their income could find themselves squeezed as a result of the central bank’s policy change.

“It will push them into looking at alternative investments that can generate a bit more yield than a straight GIC,” Shenfeld said.


 

How the Bank of Canada’s interest cut will affect mortgage rates

  1. Means my home price is going to be more. You bet, as lower the rates to zero like USA did to cause its 2008 ripple to the world.

    But don’t mind me, 2 years ago I sent 1/2 my assets to the USD and offshore to avoid the Candian crash. But its a far worse crash than I anticipated.

    So bay late summer, I sold off 90% of Canadian investments, now decided the cash is going abroad to avoid the 30 cet CAD money coming up. At this rate, its an admission form Ottawa that they are hopeless bankrupt, and only the illusion of “thin air” money and devaluing money is their plan.

    Well, as an investor, I hate being devlaued for governemtn greed, illusions and downright fraud on peoples incomes, pensions, savings and investments… so I am moving ALL my investmetnst out of Canada as this country isn’t investable any more unless you have insider help. Canada is becoming a third world corrupt country inside of 3 years.

    • @DAVE777 – If CAD is going to 30 cents, you think the USD is not going to tank?

      My guess is that by Sept/Oct we’re going to see the second shoe of the 2008 downturn hit the floor with a thump that will make 1929 look pleasant. If I had your kind of money, I’d be investing in razor blades, toilet paper, canned goods and mechanical can openers. That’s what smart Russians did in their post-1990 crisis.

  2. As a professional in the housing market in Regina (I run a website about Regina Condos for Sale), it will be interesting to see how other cities that aren’t huge in the oil market are affected.

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