Immediately after the Bank of Canada announced a rate cut of .25% in June, I received calls from some of my clients asking for advice and/or insight on how the rate cut might affect their mortgage or overall financial picture. With another announcement scheduled for July 24, I thought I’d share some perspective on how Bank of Canada rate changes might impact your financial decision-making. Many industry experts are predicting another rate drop – although they don’t agree on the exact number – and some are predicting that the next rate cut will occur in September. Let’s look at three hypothetical outcomes of the next rate announcement and what you should consider in each situation.
If Rates Decrease by .25%
FOR VARIABLE-RATE MORTGAGE HOLDERS:
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Enjoy Lower Payments: If you have a variable mortgage with an adjustable payment, you’ll see a modest reduction in your payment, and a little extra money in your bank account. If you have a variable mortgage with a fixed payment, your payment won’t change but more of it will now go toward principal, helping you stay on track with repayment.
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Pay Down Debt: For adjustable payment mortgages, using the extra cash flow to “treat yourself” might be tempting but prioritizing debt repayment is definitely the smart decision here.
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Pay Down Principal: For fixed payment variable mortgages, principal repayment is built in but if you have an adjustable payment mortgage, consider using the extra money to make prepayments on your mortgage. This can help you pay off your mortgage faster and save on interest costs.
FOR FIXED-RATE MORTGAGE HOLDERS:
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Consider Refinancing: Although a .25% decrease might not seem like much, it could be enough to justify refinancing, especially since rates have already dropped by .25% this year. If your current mortgage rate is higher, let’s touch base to review potential savings and costs.
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Prepare for Renewal: If your mortgage renewal date is approaching, keep your options open. Don’t sign your lender’s renewal offer since you may be able to secure a lower rate. Start the process early to put yourself in the most advantageous position when it’s time to make decisions.
If Rates Decrease by .5%
FOR VARIABLE-RATE MORTGAGE HOLDERS:
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Significantly Lower Payments: For adjustable payment mortgages, a larger rate decrease will result in noticeably lower mortgage payments, and for fixed payment mortgages, greater principal repayment.
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Aggressively Pay Down Debt: If you have an adjustable payment, use the extra cash to hammer down debt. I know it may not be the most fun, but your future self will thank you.
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Aggressively Pay Down Principal: For adjustable payment mortgage holders, this is a great opportunity to put a real dent in your mortgage principal and drastically reduce the total interest you’ll pay over the life of your mortgage.
FOR FIXED-RATE MORTGAGE HOLDERS:
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Strong Case for Refinancing: A .5% decrease combined with the .25% decrease in June presents a strong case for refinancing. Even after factoring in any penalties, the long-term savings might be considerable. I can review your situation and provide a thorough assessment so you can make an informed decision.
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Lock In Lower Rates for Renewal: If you’re close to renewal, this is an excellent time to lock in a lower rate. Starting the process early ensures you don’t miss out on these favourable conditions.
If Rates Stay the Same
Both variable- and fixed-rate mortgage holders won’t see any changes in their payments. As always, focus on budgeting, making additional payments to reduce principal, and planning ahead for your renewal, even if it’s a few years away. Understanding the market now can help you make informed decisions when the time comes.
Whether the Bank of Canada announces another rate drop or a rate hold, there are ways you can optimize your mortgage and improve your financial health. Paying down debt, or improving cash flow can help make your life significantly more comfortable very quickly. If you have any questions or need personalized advice, don’t hesitate to reach out. I’m here to help you navigate these changes with confidence.
Pre-Approved? If you got pre-approved (a very smart first step) prior to the June Bank of Canada rate decrease, you might be pleasantly surprised to learn that you’ve got more buying power now – and possibly even more after the July announcement. This could have big implications for your home search. Get in touch to get an updated pre-approval based on current rates.