In a bold move on Wednesday (March 4, 2020), the Bank of Canada slashed its key interest rate by 50 basis points to 1.25%, in an attempt to keep the economy moving. It cited COVID-19 as the primary reason for its decision. Although winter weather, the rail blockades, and the political climate have also played a role.  

As the country braces for economic impact, the Bank of Canada is attempting to curb anxiety and ease the concern of a possible recession.  

In an interview with BNNBloomberg, the Chief Economist with Manulife Investment Management Frances Donald says,  “We are living through history that will end up in textbooks and case studies as we analyze central bank policy, how effective it is, how quickly central banks should be reacting, and whether or not we look back and say: ‘They acted too late,’ ‘too early,’ or ‘right on time.’ Fifty basis points is a very strong message from the Bank of Canada. They are concerned about downside risks. But, I suspect that this is in conjunction with globally-coordinated rate cuts.”

What does all this mean for the real estate market? Here is what we know.

Savings for Home Buyers

The cut could mean significant savings for home buyers. The lower rate will potentially translate into lower mortgage rates. 

According to Ratehub.ca, a “full 50-basis cut to a $450,000 mortgage on a 2.6 variable rate would shift the mortgage rate to 2.1%, and mean about $115 per month in savings per month, while an $800,000 mortgage is more like $200 a month in savings.”

Banks may choose not to pass on the additional savings because it means more profit for them. Make sure to consult with a mortgage broker to get the best possible rate for your situation. They will be able to compare mortgage rates across multiple lenders.

Stimulate the Real Estate Market

Lower rates could stimulate the real estate market in slower growth areas like Newfoundland and the Prairies. 

An Imbalance

This interest rate drop might create a further imbalance in the Victoria, Toronto, Southern Ontario, Ottawa, and Montreal markets that are already facing hotter markets. Homes are in shorter supply, creating more demand and increased pricing. Economists say this is short term pain for the long term good of the economy and will help keep us out of a recession.

Higher Prices

Home prices may start to rise. As buyers are increasing the amounts they can borrow, supply might begin to drop, driving home prices up. Something to watch!

Global Considerations

Economists are predicting the international markets will slow due to the global impact of COVID-19. Why is this important? There is an anticipated slowing of the global economy, which will impact foreign investments and the supply chain in Canada.

Existing Mortgages

As explained by the Educators Financial group, if you have a mortgage already, how much – and when –you’ll feel the impact of the rate decrease will depend on whether your mortgage is variable or fixed rate, open or closed.* 

If you have a variable rate mortgage, the amount of interest is contingent on the overnight rate. Financial institutions pass on any decrease in the rate to consumers almost immediately.* 

If you have a fixed-rate mortgage, nothing will change until the fixed term ends, and it’s time to renew. * 

The New Mortgage Stress Test  

With new changes coming to the Mortgage Stress test in April, it will be interesting to see how the Bank of Canada rate drop will impact the qualifying rate.

Under the new stress test, the rate will be the weekly median five-year fixed insured mortgage rate plus 2%. A few percentage points can translate into thousands of dollars in savings for the borrower.  

Overall, it’s a great time to cash in on a lower mortgage rate if you were on the fence about purchasing. It is also a great time to sell, supply may drive housing prices up in some areas. Consult with your real estate professional for a complete view of market conditions in your area.  

*source: 

Educators Financial Group