In its final major cut of the year, the Bank of Canada has lowered the policy interest rate from 3.75 per cent to 3.25 per cent.
The 0.50 per cent cut is the fifth announcement of 2024.
Experts were predicting a 0.25 per cent interest rate cut, but that changed after Canada’s unemployment rate rose to 6.8 per cent — a nearly eight-year high if you exclude the peak pandemic years of 2020 and 2021. Statistics Canada dropped the report last Friday.
“Consumer spending and housing activity both picked up, suggesting lower interest rates are beginning to boost household spending,” stated the BoC on Wednesday.
“With inflation around 2 per cent, the economy in excess supply, and recent indicators tilted towards softer growth than projected, Governing Council decided to reduce the policy rate by a further 50 basis points to support growth and keep inflation close to the middle of the 1-3 per cent target range,” it added.
Bank of Canada reduces policy rate by 50 basis points to 3¼%https://t.co/MuMPaqbieR#economy #cdnecon
— Bank of Canada (@bankofcanada) December 11, 2024
The Bank also made a jumbo-sized cut in October, reducing its key interest rate by half a point to 3.75 per cent. It has been lowering the policy rate substantially since June, when it dropped the interest rate from a longstanding 5 per cent to 4.75 per cent. That move was the first in more than four years, following six rate holds.
“The BoC could lean toward a larger cut following the most recent GDP report, which not only showed quarterly growth underperforming the Bank’s own forecast, but that the per-capita measure contracted for the sixth consecutive time,” Ratehub.ca’s Penelope Graham said in an email before the announcement.
“It’s clear Canadian citizens and businesses are increasingly feeling the effects of deepening ‘me-cession’ and the steep cost of living.”
The next policy rate update is set for January 29, 2025.
How the BoC interest rate cut affects mortgages
Licensed mortgage broker and LowestRates.ca expert Leah Zlatkin says homebuyers are facing a dilemma right now.
“We’re seeing strong sales and rising home prices, but there’s also a sense of caution in the air with economic uncertainty and affordability concerns,” she shared in an email.
“It’s a dynamic market where both opportunity and risk are present. Ultimately, the decision to buy or wait hinges on your individual circumstances and how much risk you’re comfortable with.”
Zlatkin added that this new interest rate cut is “likely to intensify the situation.”
“With home prices already increasing and demand surging, those waiting for a cool down may find themselves priced out,” she explained. “Buyers need to carefully weigh the potential benefits of waiting against the risks of further price escalation and competition.”
Regardless of the uncertainties, the rate cut is good news for current variable rate mortgage holders, according to Zlatkin.
“They’ll see an immediate decrease in their monthly payments, providing some relief amidst the rising cost of living,” she said. “This also frees up some cash flow, which can be used for other financial goals, like paying down debt or increasing savings.”
Experts at Ratehub.ca said what would happen in a hypothetical mortgage situation if the rate were cut by 0.5 per cent.
Let’s say a homeowner put a 10 per cent down payment on a $669,630 property — the average home price per September CREA numbers — with a five-year variable rate of 5.30 per cent amortized over 25 years (total mortgage amount of $621,350). They have a monthly mortgage payment of $3,721.
Using Ratehub.ca’s mortgage payment calculator, if a 0.5 per cent rate cut is announced, the homeowner’s variable mortgage rate will dip to 4.80 per cent, and their monthly payment will drop to $3,543.
This means the homeowner will pay $178 less monthly or $2,136 less per year on their mortgage payments.
With files from Imaan Sheikh
Gary A Corcoran Arts/Shutterstock
