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October 23, 2024
December 11th, 2024
Happy Holidays from the Bank of Canada!
Another 50bps rate cut, topped with a GST holiday and a side of rebate cheques in the mail, could it get any more festive? Is the federal government putting Santa out of business? Or, at a minimum, stealing all his thunder?!
All kidding aside, today’s rate cut is good news for both variable rate mortgage holders and people who are carrying balances on lines of credit.
The big question is why the big decrease in the Prime Rate? Are we in economic trouble?
No, but there are things on the economic horizon that we need to get ahead of now.
Here are some of the things that Tiff brought up in the press release:
- Slower Economic Growth: Canada’s economy grew just 1% in the third quarter, falling short of expectations. Business investments and exports have been weak, and the last quarter of the year doesn’t look much better.
- More Supply Than Demand: The job market is cooling, with unemployment hitting 6.8%. This means the economy isn’t bouncing back as quickly as hoped.
- Inflation Under Control: Inflation has stayed at around 2% since the summer, which gives the Bank room to cut rates without worrying about prices rising too much.
Good News in the Economy
However, not everything is gloomy; here are the positive signs:
- More Spending and Home Buying: Lower rates are encouraging people to spend and buy homes, which is great for the economy.
- Better GDP Numbers: Updated stats show the economy has been stronger over the last few years than we thought, thanks to more investment and spending.
- Slower Wage Increases: While wages are still growing, they’re not climbing as fast. This could help businesses stay competitive.
All in all, today’s rate cut was about easing up on the economic brakes and getting back to a more neutral policy rate. Expect this 50bps rate cut to be the last one, with 25bps as needed in 2025.
What’s Ahead for 2025?
The Bank of Canada expects the economy to grow more slowly in 2025. Lower immigration and global trade uncertainties are big factors. Inflation, however, is expected to stay close to the 2% target, which is good news for stability.
What does this mean for mortgage rates?
The banks are still hesitant to advertise mortgage rate discounts aggressively. Once more clarity exists in our economic future, the cost of funds ( how much the bank has to pay to raise money for fund mortgages ) should settle down. Hopefully, with the new mortgage switch rules that are coming in next week, the competitive pressure will heat up, and the banks will be forced to pass on any savings to the consumer.
Variable-rate mortgages, on the other hand, could become more appealing if the BOC continues to lower rates. If you look at the chart below (courtesy of Mortgage Logic News), which is based on current economic conditions and anticipated interest rates, choosing a variable-rate mortgage could be beneficial. The caveat is that choosing a variable mortgage shouldn’t be made solely on savings. It requires an assessment of your ability to handle fluctuations, both emotionally and financially.
The Bottom Line: What This Means for Your Mortgage
Since the pace of future cuts is uncertain, staying flexible is key. If you prefer the stability of fixed rates, choosing a shorter term (less than four years) might be the smartest move for now.
As mentioned above, given today’s rate cut and the signs of a slowing economy, variable-rate mortgages are starting to reemerge as an attractive option. The key advantage being that you can convert it to a fixed mortgage down the road, allowing you the ability to reassess your options as the market evolves.
In short, you’ll need to speak with a mortgage expert to assess your current financial situation in the context of the latest economic news before diving into any mortgage decisions.
Have a wonderful holiday surrounded by those who love you! Enjoy the time off and fingers crossed for more snow on the local mountains!
The next Bank of Canada meeting is January 29th, 2025
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