Since the Bank of Canada reduced their overnight lending rate to 0.5 in early July, the real estate world has been torn on what this might mean for home buyers and sellers.
With the state of the Canadian economy in slight turmoil due to fluctuating oil prices, the Bank of Canada execs made the decision to slash their benchmark lending rate by a quarter of a percent point, for a second time this year. The previous cut, by the same amount, came in January and shocked markets as it came with little indication and after nearly five years of dormant rate levels.
“The central bank is hoping to stimulate the flagging economy while avoiding adding to Canadian’s already troublesome debt levels,” Angelo Melina, a University of Toronto economics professor and former special adviser to the Bank of Canada told CBC News in July. “There’ll be some encouragement to borrow more, but it won’t be as much as you usually get from a cut.”
What does this mean for the state of Canada’s current red-hot housing market? Mortgage lending has sustained the upward movement in home prices, as well as record sales in pricey markets of Vancouver and Toronto, the country’s most expensive cities. Prices were up again by double digits during June.
Some analysts believe the cut will only fuel rising home prices and sales in the short term. But there is an underlying fear of a market correction down the road. Though other major lending institutions may be hesitant to follow the Bank of Canada’s drastic moves, they will almost certainly drop variable rate mortgages to new lows, with the pressure on to lower their fixed mortgage rates as well. It sounds like extra money in your pocket but realistically, while the banks will likely lower consumer borrowing costs a little, the bet is that they’ll offer a 10 basis points to consumers, and keep the other 15, and TD has already done just that.
Buyers need also be aware that the federal government is considering a move that will increase the minimum down payment required to buy a house. Up until this point, first-time buyers benefited from only having to offer 5% down. The government is also looking at putting restrictions on higher-priced housing, which will most likely affect buyers and sellers in Canada’s two most expensive cities.
Though variable mortgage rates are being offered at slightly below 2 percent, and fixed-rate mortgages are going for about 2.5, homeowners stand to benefit more from locking into a higher fixed-rate mortgage than riding the wave and hoping rates don’t skyrocket with a downturn in the economy.