The Impact of Declining Mortgage Rates on Canadian Mortgage Borrowers

As the Canadian mortgage market continues to evolve, one of the most interesting topics today is the impact of declining mortgage rates on homeowners. With the Bank of Canada now cutting rates three times and expectations for further cuts, many Canadians are seeking guidance on how to manage their mortgages effectively. This blog post will explore the current landscape, the challenges homeowners face, and strategies to navigate this environment.

How Do Declining Rates Help Mortgage Borrowers?

Over the past few months, the Bank of Canada has cut interest rates to address a weakening economy. The declining rate of inflation has provided them some room to make rate cuts. The Bank of Canada’s key target interest rate is now 4.25%, down from 5% just three months ago. Economists anticipate further cuts, possibly bringing the key target rate down closer to 3% by the end of 2025. This shift in the direction of interest rates has significant implications for mortgage borrowers.

The two most prominent ways that declining interest rates help existing and prospective homeowners are:

1. Those with an existing mortgage can benefit from lower payments. This occurs if:



a. They have a variable-rate mortgage that allows for payments to decline as rates decline. If it is a static-payment variable-rate mortgage, the payment won’t decline but the interest component of the regular payment will be lower; or

b. They have a mortgage coming up for renewal and can benefit from a lower mortgage payment due to lower mortgage rates at renewal.

2. New homebuyers will benefit from lower rates via increased purchasing power. Mortgage borrowers can qualify for more mortgage at lower rates, allowing them to afford a larger home. With three rates cuts so far this summer, equal to 0.75%, purchasing power has increased by roughly 6%-7%.

The financial impact of 1. above if you have an adjustable-rate mortgage where the size of the mortgage payment changes when the Prime Rate changes (assuming a $400,000 mortgage) is as follows:

The 0.75% drop in the Prime Rate since the beginning of June leads to payment savings of $177 per month on a $400,000 mortgage, providing some relief to adjustable-rate mortgage holders. If you have a variable-rate mortgage with a fixed, or static, payment you are paying $177 less in interest but your payment remains the same. This means that you would be amortizing your mortgage by an additional $177 per month at the reduced rate of 5.45%.

Challenges Faced by Homeowners

One of the reasons Canadians have historically preferred fixed mortgage rates over variable mortgage rates is the certainty that fixed rates offer. Having a locked-in mortgage rate and a set monthly payment that doesn’t change during the term of the mortgage provides certainty and makes managing personal finances easier. Mortgage borrowers with a higher risk tolerance often prefer a variable-rate mortgage but need to constantly monitor rates and stay on top of things to make sure they know how changing rates are impacting them.

Living in this declining rate environment highlights the conundrum of deciding whether fixed or variable is the right choice. That decision is personal. We discuss this in detail in this recent blog - blog-fixed-rate-or-variable-rate-mortgage.

Other than the decision on what rate type is best for your mortgage financing, there are a few other considerations for mortgage borrowers to consider:

• Rates Remain High - the recent decline in rates is a positive for mortgage borrowers and homeowners. However, mortgage rates today are higher than the mortgage rates of a few years ago. This means that most mortgages renewing in the near future will be renewing into higher rates. Pay close attention to this if your mortgage is renewing and understand the impact.
• Refinancing Decisions - lower rates present an opportunity for refinancing, but existing mortgage borrowers must carefully weigh the benefits of refinancing their mortgage against the costs of prepayment penalties and fees associated with breaking their current mortgage. Seek advice from your mortgage broker or loan officer before making a mortgage refinancing decision.
• Market Dynamics - declining rates can stimulate housing demand, potentially leading to increasing home prices. This can impact affordability for new homebuyers and offset the benefits of lower borrowing costs.

Strategies for Navigating Declining Mortgage Rates

• Review Your Financial Situation - whether you are an existing borrower or a prospective borrower you need to start by assessing your current financial health. Understand your income, expenses, and how much you can comfortably afford to pay each month. This will help you make informed decisions about your mortgage options and avoid over-extending yourself. Avoid exuberance and embrace careful analysis.
• Consider Fixed-Rate Mortgages - if you are currently on a variable-rate mortgage, consider switching to a fixed-rate mortgage. If you are currently in a variable-rate you know the pain from being exposed to interest rate risk. That is a risk to avoid unless you can afford to be wrong on the direction of unpredictable future interest rates. Yes, a variable-rate mortgage allows you to benefit further from declining rates, but variable rates are much higher than fixed rates today. Fixed rates offer stability and predictability, which can be beneficial even in a declining rate environment, especially today where fixed rates are the lowest rates.
• Consider All Your Mortgage Renewal Options - if you have an upcoming mortgage renewal your timing may be beneficial. You can now renew into lower rates than just a few months ago. Mortgage renewal is an opportunity to re-consider your mortgage needs. You can re-negotiate with your existing lender, switch to a new lender or refinance into a mortgage that better suits your needs.
  If you have a mortgage renewing soon you will likely be renewing at a rate higher than the mortgage rate on your existing mortgage. Make sure to understand the impact this has on your mortgage payments and monthly budget. Today’s declining rate environment is a welcome change, but today’s rates are still higher than they were a few years ago.
• Explore The Market - CMHC recently reported that 43% of Canadian mortgage borrowers only considered one mortgage offer when getting their current mortgage. These borrowers may be missing out. There are dozens of lenders in the market that want your business, and they will compete for that business. You can benefit financially by shopping around to find the bests deals. The best way to do this is to find a good, experienced broker that deals with these dozens of lenders. They can find you the lowest rates on any given day and ensure you get the best deal. Visit us at frankmortgage.com to see an example of how to find the best rates.
• Consider Mortgage Refinancing - recent turmoil in the markets due to changes in interest rates and home prices and now a weakening economy has changed the financial outlook for most Canadians. According to a recent Leger survey, 60% of Canadian mortgage borrowers are stressed about their mortgage. If this is you, you may want to consider refinancing your mortgage. Doing so can help you potentially consolidate debt, extend your amortization to lower your mortgage payment or get access to additional funds you may need. Refinancing at renewal can be done without prepayment penalties but if you are early refinancing be careful of any penalties for breaking your mortgage.
• Utilize Prepayment Privileges - if your financial situation allows, make lump-sum payments or increase your regular payments to reduce your principal faster. This can help mitigate the impact of higher interest rates over time. Speeding up the amortization of your mortgage this way reduces your cost of servicing the debt over time and will make your next mortgage renewal easier.
• Seek Professional Advice - working with a mortgage broker can provide valuable insights and provide you with access to a wider range of mortgage products. Mortgage brokers help you navigate the complexities of the mortgage market will do the work to get your mortgage application successfully completed.

Conclusion

Navigating the current mortgage market requires careful planning and informed decision-making. Declining interest rates will create a more positive mortgage financing environment but be sure to understand your needs and risk tolerance before deciding on what mortgage option is best for you. 

For personalized advice and support, consider reaching out to a reputable mortgage broker who can guide you through the ever-changing mortgage market. Reach out to us at Frank Mortgage – www.frankmortgage.com or 1-888-850-1337. We have the experience and access to Canada’s best lenders so that we can provide you with the best mortgage options for your personal needs.