The Bank of Canada's Rate Cut: Understanding the Impact on Your Mortgage.

Bank of Canada Rate Cut: Will It Really Make Housing More Accessible?

The Bank of Canada announced a 0.25% cut in interest rates on June 6, 2024, the first such cut in 4 years. If you’ve been following the news, you’ve probably heard a lot of buzz about how this will make housing more affordable and accessible. But let’s take a step back and ask: will it? Let's dive into what this means for all of us and whether it will truly impact our wallets and housing dreams.

The Big Announcement: What Happened?

The Bank of Canada decided to lower the cost of borrowing money, which they hope will stimulate the economy. Think of it as them turning on the money tap a little more to encourage spending and investment. On the surface, this sounds great – cheaper loans and mortgages for everyone! But let’s dig deeper.

Impact on Current Homeowners

Fixed-Rate Mortgage Holders

This announcement doesn’t change your current payments if you have a fixed-rate mortgage, your rate is locked in, and it will stay the same until your term ends. You might get a slightly better deal when you renew, but that’s a big “might.” Many current mortgage holders set up their loans when rates were much lower and even though rates have come down, a renewal will mean a higher rate for many people.

Variable-Rate Mortgage Holders

For those with variable-rate mortgages, you’ll see an immediate drop in your monthly payments or interest component of your payment. That’s good news, right? Sure, but it’s important to remember that these savings might not be as significant as you’d hope. A 0.25% cut might save you some money each month, but it won’t drastically change your financial situation. A 0.25% rate cut translates to about $13 less interest, per month, on each $100,000 of outstanding debt. So, if you have a $500,000 outstanding loan, you can expect a reduction in your monthly payment of just over $60 per month.

For Future Homebuyers: Is It a Game-Changer?

The narrative is that lower interest rates will make buying a home more affordable. But here’s the catch: even if your monthly mortgage payments go down a bit, the overall cost of homes isn’t necessarily going to follow suit. British Columbia’s real estate market is a beast of its own. Lower interest rates could mean more buyers jumping into the market, which might drive prices even higher. So, while your mortgage might be cheaper, the price tag on homes could keep soaring, making it just as tough to get a foot in the door. For sellers, this might seem like a good time to cash in. 

But for buyers, especially first-time homebuyers, it feels like running on a treadmill – you’re moving, but not really getting anywhere. With the average home price in BC sitting at $1,006,248 (WOWA.ca, April 2024), and assuming a potential borrower has 20% to put down, a 25-year amortized mortgage at 5.25% would have a monthly payment of almost $4800. With only 10% down the payments climb to approximately $5,400 per month, and with 5% down the payment would be almost $5,700 per month. So what does "more affordable" really mean?
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