Variable Mortgage Rates in Canada: The Impact of the Bank of Canada’s Rate Cut

Introduction

As the Bank of Canada (BoC) reduces its overnight rate, the landscape of variable mortgage rates is shifting. Experts predict that variable rates could dip below their fixed counterparts, yet lingering apprehensions from past financial turmoil and overall economic uncertainties may keep the housing market subdued.

Current Economic Landscape

CIBC economist Benjamin Tal suggests that key indicators related to employment, inflation, and housing prompted the BoC’s decision to lower rates. “The green light is on not only for September but also potentially beyond,” Tal remarked. However, he cautions that the current policy rate is already close to neutral, indicating that future rate relief will be modest at best.

Market Expectations

Prior to the BoC’s announcement, market analysts were largely anticipating a series of rate cuts, according to Ron Butler, a broker at Butler Mortgage. This rate cut is expected to have a direct effect on variable mortgage rates, which may soon undercut fixed rates.

The Shift in Mortgage Dynamics

Variable Rates Gain Favor, But With Caution

The expectation that variable rates might surpass fixed rates could entice potential borrowers. Butler notes that lenders are enhancing discounts on variable mortgages, making them more appealing. However, the allure of variable rates has diminished significantly since the pandemic era, where borrowers experienced sharp increases in payments.

Tal reflected on this shift, stating, “Previously, when rates fell, 75% of borrowers opted for variable. That number will be much lower now.” Butler echoed this sentiment, asserting that the “heyday of variable may have passed.”

Fixed Rates Also Decline, Yet Demand Remains Low

Although fixed mortgage rates have decreased from last year’s peaks, the renewed affordability has not translated to a surge in housing demand. Butler observes that three-year insured fixed terms have dropped to around 3.69%, down significantly from the mid-5% range observed in 2024. Despite these improvements in borrowing conditions, home sales, particularly in the Greater Toronto Area (GTA), remain stagnant, with most properties selling below their asking prices.

Long-Term Economic Considerations

Tal warns that any further declines in mortgage rates are unlikely, given factors such as U.S. deficits, persistent inflation, and Ottawa’s significant borrowing. “Any change in the five-year rate will be too small to change the narrative,” he said.

Psychological Barriers in the Housing Market

The challenges facing the housing market extend beyond merely financial factors. “Confidence is the main issue in the housing market,” Tal states. The lingering uncertainties from tariffs and shifting market dynamics have caused many potential buyers and sellers to hesitate. Kottick, president of Re/Max Canada, noted that this “wait-and-see” attitude persists.

Changing Buyer Dynamics

Today’s market landscape is markedly different from previous years. Butler points out that speculative purchases, such as buying properties to rent or flip, are virtually nonexistent. The exuberance seen in 2021 has given way to a more conservative approach from buyers and sellers alike.

Balancing Buyer and Seller Interests

As the market evolves, Kottick mentions that the “gap between buyers and sellers has narrowed.” Sellers are now pricing properties more in line with current market conditions, and many who are unwilling to adjust their expectations may choose not to list their homes at all.

The Renewal Challenge

A critical issue arising from the evolving mortgage landscape is the pressure of renewal rates. While predictions of systemic shock have diminished, many households still face heightened costs. Tal points out that homeowners who locked in rates around 1.7% during the pandemic are now facing renewal rates closer to 4%, resulting in significant increases in their monthly payments.

While some homeowners are managing these increases, the overall sentiment is one of discomfort. As Butler notes, the refrain is often, “We can manage, but it hurts.” He adds that the market has weathered the rise of variable rates from 1.45% to over 6%, indicating resilience among borrowers.

Conclusion

Despite the BoC’s decision to cut rates by 25 basis points, challenges surrounding affordability and market confidence are likely to persist. “You cannot solve something that has taken 20, 30 years to build up in five minutes,” Tal asserts. Kottick reinforces this by arguing that only an increase in housing supply can genuinely address the imbalance between demand and inventory.

Stay Informed

For ongoing insights into the Canadian mortgage market and economic conditions, follow updates from John MacFarlane, a senior reporter at Yahoo Finance Canada, on social media.

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