On June 5, the Bank of Canada announced it was cutting its overnight interest rate to 4.75%—down from 5%. This was the first rate change since July 2023. On July 24, the Bank of Canada made a further rate cut of 0.25%, reducing the overnight interest rate to 4.50%. Canadians are waiting with bated breath to see whether further rate relief is on its way.
Whether rates drop further or stay the same, brokers need to stay informed and be ready to discuss potential changes to their clients’ financial plans and strategies. Many mortgage holders will be looking for opportunities and relief from falling interest rates, making private mortgages an important solution to consider. The Bank of Canada’s interest rate decisions greatly influence the Canadian mortgage market and borrower behavior. This article will break down these interest rate changes, examine the current rate environment, and equip you with the knowledge and tools – like private lending solutions – to guide your clients through upcoming interest rate announcements and their implications.
Understanding the rate changes
Between March 2022 and July 2023, the Bank of Canada raised interest rates 10 times to bring its benchmark rate to 5% from 0.25%. This represents one of the most aggressive monetary policy tightening campaigns in history.
The Bank of Canada uses its benchmark interest rate to control inflation and the economy. Specifically, if interest rates are higher, it becomes harder for Canadian families and businesses to borrow money and service their debts, which leads to lower demand for goods and services, which then, in turn, should result in lower or plateaued pricing.
Canada’s annual inflation rate unexpectedly rose slightly to 2.9% in May 2024 from 2.7% the month before, creating a brief sense of uncertainty as to whether the Bank of Canada will continue on its path of gradually cutting its rate. In June, however, inflation eased more than expected, with the Consumer Price Index (CPI) up 2.7% on an annual basis, restoring expectations for another rate cut on July 24.. In one report, a chief economist at CIBC mused that a July rate cut is more likely than not, along with two more cuts to follow. Avery Shenfeld noted that the Bank of Canada focuses on three-month averages and year-over-year rates, as month-over-month data can be more volatile.
The Bank of Canada also relies on other factors when it comes to its overnight interest rate decisions, noting that it “draws on useful information and insights from both inside and outside the bank”. This includes data from agencies like Statistics Canada, analysis and forecasts from other banks and governments, and other private sector economists. In addition, the bank will consider input from other stakeholder groups and surveys such as the Bank’s Business Outlook Survey and the Canadian Survey of Consumer Expectations.
What do the rate changes mean for borrowers?
With further rate cuts expected in the balance of the year, homeowners and home buyers are likely to reach out to you to see if there’s a possibility for savings. If the Bank of Canada chooses to further drop its overnight interest rate, it could fuel consumer confidence; however, it won’t result in significant or immediate relief for most homeowners.
Homeowners with a variable-rate mortgage may see a small reduction in their monthly payments, but it will remain a far cry from their pre-pandemic costs. Those renewing fixed mortgages will likely still face the same challenges despite the small rate change. According to one report, only about half of Canadian mortgage borrowers have renewed into higher rates. Those with upcoming renewals will experience greater payment shocks, as the gap between their existing rate and their renewal rate will be wider. The Bank of Canada estimates that average mortgage payments have already increased by about 9% and expects that to nearly double to 17% by 2027. The high interest rate environment has also made it more difficult for first-time home buyers to enter the housing market. However, continued gradual rate decreases could make the market more accessible for some.
Rate changes also impact Canadians that have other forms of consumer debt, such as credit cards and other loans. With rates coming down slowly, the Bank of Canada is expecting the economy to start picking back up in the second half of this year and into 2025.
Adapting client strategies in a changing market
In a period of fluctuating rates and economic uncertainty, you can provide valuable guidance and support to your clients. While rates are gradually coming down, relief won’t be immediate for most borrowers. Fixed-rate mortgage holders will continue to face significantly higher monthly payments. This is an excellent opportunity to review clients’ borrowing situations and adjust their strategies to align with the changing mortgage landscape.
Focus on clients with upcoming mortgage maturities. Reach out to those renewing within the next six months to one year to ensure they are well-positioned for any new opportunities, such as debt consolidation or a move to a new lender, as well as competitive offers. A mortgage remains the most cost effective borrowing option compared to credit cards and most other personal loans. According to the Bank of Canada, the average interest rate on outstanding credit card balances in Canada was 20.50%.
With interest rates expected to be lower later this year and into 2025, now is an ideal time to help clients improve their credit situation and debt servicing ratios before it’s time to renew. Private lenders like CMI can offer a second mortgage to consolidate high interest debt and improve their credit scores. For clients with a Beacon score below 680, renewing their mortgage will be particularly challenging, and their financing challenges could worsen. This is an opportunity for you to use your guidance, expertise, and private mortgage lender relationships to set them up for success.
Private lending in a changing rate environment
While private lending rates are not directly impacted by Bank of Canada rate changes, the general market trend does influence private lenders’ expectations for returns. Private mortgage lenders make their lending decisions based on the strength of a client’s overall circumstances and typically set rates on a case-by-case basis based on the risk profile of the specific scenario.
By understanding the economic context, market trends, and risk management strategies, you can effectively guide your clients through this evolving borrowing landscape. Preparation is crucial for helping today’s home buyers and homeowners navigate through this period of rate change. Staying informed about private mortgage solutions will enable you to provide strategic, proactive advice, better meet your clients’ changing needs, serve a wider range of borrowers, and grow your business in the process. At CMI, we have a proven track record as a transparent and trusted private mortgage lending partner. We can help you deliver the flexible financing solutions your clients need. Contact us today
