Mortgage 101 – Bank of Canada Interest Rate Cut

Clinton and Todd discuss the Bank of Canada’s recent rate cut of 25 basis points, with predictions of further cuts in October and December, opening up the market for some buyers.

Todd Veinotte
All right, welcome back to Mortgage 101. Your guide to home ownership with Clinton Wilkins and myself, Todd Veinotte, and we’re reacting to the Bank of Canada news, right?

Clinton Wilkins
We are! The bank Canada met on September 4 and lowered 25 basis points. Economists by and large had predicted it, and really they’re predicting the Bank of Canada is going to be much more aggressive in their rate cuts. You know, when they first started cutting. I was, estimating maybe 125- 150 or 175-200 basis points in terms of rate cuts. I think we might see it even more aggressive than that right now. And we have another meeting on October 23rd and then again in December. So there’s two more meetings this year. And I’ll bet we’re gonna see two more cuts. I think that we will so I’m going to be watching very closely. And you know, I think that it’s going to be a good thing for Canadians having the rates being lower. Obviously, inflation is a big piece of the pie here. And right now, inflation is moving in the right direction, and economists are basically forecasting that if the housing inflation had subsided, and obviously interest rates were lower, inflation would be basically at 1%. So housing, and this cost of housing and the cost of borrowing is really having a big impact on inflation. So that’s something we’re going to be watching very, very carefully. Now, the August inflation numbers are not out yet as the time that we’re recording the show, so we’re going to be obviously keeping a close eye on that. We’re gonna be watching GDP, and we’re gonna be watching what is going on in the US and see what that what they do with the Feds and that rate.

Todd Veinotte
Yeah, I find it interesting that inflation is tied to mortgage lending and of course, mortgage lending is tied to inflation.

Clinton Wilkins
And one can be inflationary. Especially if the rates do go down too quickly, too low, that can be inflationary. Because then maybe Canadians have more access to very, very, very low credit, very cheap credit, and maybe that’s going to drive the prices of real estate up. And that’s my fear. My fear is that we have buyers that are on the sidelines right now and say, I’m just going to wait for the rates to go down a little bit. But they wait, and then as soon as the rates go down, the prices of the real estate’s going to be up. What we say is, you can always date the rate, but you’re marrying the home, right? So the purchase price, that’s not changing the rate. The rate can change. So, you know, that’s something to really take into account. And, you know, I think Tiff Macklem, The governor of the Bank of Canada,gets this right 0% of the time. And they’re always more cautious than they need to be. They’re overly cautious, and they’re always going to err on the side of reducing inflation. They never want to be necessarily driving that inflation, unless we’re really in a situation like covid. I mean, nothing was like that, and who would have guessed, but things are moving in the right direction, and consumers are certainly more and more taking a variable rate mortgage every day.

Todd Veinotte
Yeah. So I find it interesting though, that people will, when prices go up, or rather, when interest rates go up, people are really coming back, we’re not talking about a big swing here.

Clinton Wilkins
This is basically a gentle landing. Yeah, we are coasting on the way down.

Todd Veinotte
So, I guess it’s just funny how gleeful people are when they’re saving not a lot at 25 basis points. I mean, we’re not talking huge dollars here.

Clinton Wilkins
Depending on the type of product that you have. Or give people a little bit of a rundown on what’s going to happen now. And now that the bank can has lowered the key overnight rate now the bank prime is going to be 6.45 and that means that if you had a variable rate mortgage that has an adjustable payment, your payments going to go down. If you have a variable rate mortgage, that the amortization changes, your amortization will get shorter. If you have a secure line of credit, your actual interest cost is going to be less that you’re paying every month. Or if you have any unsecured products that are tied to the bank prime rate, your cost of borrowing is going to be less. So all of these things are positive, but you know, a 25 basis point change doesn’t make a huge difference. But you know what? It’s the trend. Things are going in the right direction. And you know, I think that we’re gonna continue to see this trend for several, several months, and I think into at least the end of next year.

Todd Veinotte
All right, so how low will it go?

Clinton Wilkins
That’s the real question. Now, the prime being 6.45 I think that we can see the prime in that 4% range. And you know, a lot of Canadians will have mortgages again. And you know, in the 3% range, I’d love to have a mortgage at three point something. I redid my mortgage not that long ago. I did a 25 year amortization, and the type of product that I’m in, the payment doesn’t change when the prime rate goes down. Obviously, I believe in variable. We talk about variable a lot, but since I’ve done it, and now there’s been these rate cuts, my amortization is down, like three years. And I’m waiting, I’m waiting just to see the change. Once this latest impact, this latest rate cut changes, I’m gonna have be having a look too and see how many years it’s going to be cutting off,.

Todd Veinotte
But we’re not going to see anything like we saw when they were historical lows.

Clinton Wilkins
I mean, it depends. Who knows. I mean, I hope there’s not going to be another pandemic. I hope there’s not going to be a world war. But I mean, really, anything can happen, and that’s why people, you know, some people, are like, well, fixed rate safer, but is it? It’s not necessarily. Because what happens if you need to break the mortgage early, you could have much higher penalty. And what happens if you take this five year fix today and the rates are down at 3% that’s a large opportunity cost, just for you to, you know, not be weathering the storm. So you know, fix isn’t right for everyone. Variable is not right for everyone. Everybody’s situation is different, but that’s where I think it’s important to listen and ask the questions and make sure that it’s gonna be the right product for the right person based on the really the risk tolerance and what’s going on in their life.

Todd Veinotte
Yeah, absolutely. So all this talk about people who who had this historical low mortgage five years ago, and all these renewals, and it was kind of doom and gloom and the renewal cliff, right? Did that come to fruition or no?

Clinton Wilkins
I think it could be coming. It could be coming in Ontario, and it could be happening in BC. Do I think that’s going to happen in in Nova Scotia and Halifax? I don’t think so. Why? We’re very conservative here, and also we have such a huge demand for housing, you know, if you need to sell your house, Todd, you could list it and you’re going to sell it like that. It’s not like that in Ontario right now, that market is very, very soft. Their prices are going down. People are not doing construction. It’s a very different story here in Halifax and even in the prairies, very different story. So, you know, I think it really depends where in the country you are.

Todd Veinotte
Can you imagine if you were in Toronto and you bought a condo or one of these houses at the top of the market couple two years ago, and now you’re looking at this thing…

Clinton Wilkins
Hopefully you’re planning on staying in that house for five to 10 years, plus, just to maybe try to balance out and make a couple bucks? Yeah, it’s not like it is here, and it’s gonna be a long time before we’re in that more balanced market, one we’re just not doing enough construction, and we have more demand in the marketplace than we have.

Todd Veinotte
So they built too many homes in Toronto?

Clinton Wilkins
I think where the price got to, it just became a point of not being affordable. And, you know, we talk about what the average price is here in Halifax, let’s say it’s $500,000 for a single family home. You’re lucky to get a one bedroom or a bachelor condo in Toronto for that price point, so and you need two incomes, it just becomes that it prices so many people out of the marketplace, and there’s only so much demand at that price point. So, you know, it’s a completely different market, and the economics are different than they are here.

Todd Veinotte
right, so you were, you were suggesting that we’re going to go down. This trend is going to continue.

Clinton Wilkins
I think it’s going to continue. And I think we’re going to continue to see the trend go down between now and the end of next year, I’m honestly here for it, and I’m here for borrowers getting more educated and more borrowers are coming in asking for our variable rate mortgage. They know it’s more expensive today, but they’re willing to weather the storm, I think partially our clients, because they have me and I can give them the perspective. We’re sending out email and SMS, and you know, we’re able to give them that opinion. But borrowers overall, I think, are getting more savvy, and they know that if you break your variable rate mortgage early, you’re going to pay a penalty of only three months interest, but you could also convert your variable into a fixed so it’s kind of the best of both worlds, if you’re willing to weather it. Not everybody is, yeah, some people just are too nervous, you know, may or maybe their finances are just too tight, or maybe with a stress test, they can’t even be approved in a variable Todd. So that’s why I’m like, everybody’s situation is different, yeah, but at renewal, if you’re doing a refinance, if you’re purchasing, if you’re doing any transaction, I’m like, Okay, what’s going to be the best thing for this person?

Todd Veinotte
All right? So all that said, we can talk about the Fall market, obviously coming up, and lots of other things.

Clinton Wilkins
A lot of anticipation this Fall market, and the Fall for us, typically, has been a very, very busy market. And we’ll talk about. With that more when we come back.

Todd Veinotte
Okay, Mortgage 101. Your guide to home ownership.