Bank of Canada Announces Interest Rate Hold

A press release from the Bank of Canada’s Media Relation Team on January 24th announced it will maintain policy rate, and is continuing its policy of quantitative tightening. The current bank rate is holding at 5.25% and the deposit rate at 5%.

As global economic growth continues to slow, with inflation easing gradually across most economies. With weakened consumer spending and business investment, the economy looks to be in mild contraction. In Canada, the economy has been stalled since the middle of 2023 and growth likely remains close to zero through the first quarter of 2024. The Bank of Canada is turning its attention to when it may be able to start cutting interest rates.  

When Can We Expect to See Interest Rates Decrease In Canada?

“With overall demand and the economy no longer running ahead of supply, governing council’s discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level,” Governor Tiff Macklem announced in a press conference about the central banks decision to hold interest rates. Interest rate cuts are coming, but the Bank of Canada won’t say when. “It is important that we don’t give Canadians a false sense of precision,” Maklem told reporters.   

Reading the bank’s projections, the bank expects inflation to decelerate to 2.5% by the end of the year. Most economists expect the central bank will start lowering interest rates by the summer.  

Impact of Rate Cuts for Canadians

A rate cut is a decision by a central bank to reduce the main interest rate. The Bank of Canada’s decisions over the next few months could influence whether the economy has a soft landing or falls into a recession. Rate cuts can impact people and businesses in a number of ways lets go over a few of them here: 

•  Normalization of spending

A change in bank rate affects how much people can spend and how much people spend influences how much things cost. Overall, we know that if we lower interest rates, this tends to lead to increased spending. When we are spending too little, that reduces businesses and leads to people losing their jobs. On the other hand lower rates also tend to increase the value of wealth, such as peoples pensions and housing.  

•  Increased borrowing and increased lending

With Increased borrowing, lower interest rates make it cheaper for people and businesses to borrow money. This encourages households to borrow more which can increase the demand for assets such as housing. Hand in hand is increased lending, lower lending rates can increase investment spending by businesses like on new equipment or buildings. Businesses are generally better off when they can borrow money cheaply and when consumers can spend more freely 

• Lower interest paid overall to mortgage terms

Expected cuts to federal rates result in a corresponding decline in mortgage interest rates.  A rate cut can help consumers save money by reducing interest payments on certain types of financing that are linked to prime or other rates. Typically, a rate cut lowers the cost of financing a home. However, the extent of the savings from lower mortgage rates will depend on the type of mortgage loan .  

How Do Lower Interest Rates Affect Mortgage Rates?

For fixed rate mortgages, a rate cut will have a low impact on the monthly payment amount. Low rates will be good for homeowners and potential home buyers. Generally speaking, when federal rate cuts are issued, adjustable rate mortgage payments will decrease. The amount by which mortgage payments change depend on the rate the mortgage uses when it resets.   

Mortgage Renewals in 2024

When a mortgage is renewed, the interest rate is updated and the payment is recalculated. If the interest rate has gone down since the mortgage loan agreement was made, the payments upon renewal will be lower. Renewing a mortgage early can save money if the rate is lower than your current rate, or the anticipated future rate. Renewing early can lock in a lower rate potentially saving money over the course of the mortgage. According to Investopedia, refinancing is a good idea if the interest rate can be reduced by at least 2%. However many l;enders say even 1% savings is enough of an incentive to refinance your mortgage.

Overall Mortgage Rates Decrease

The decisions Canadians make on their mortgages in 2024 will largely depend on the rate forecasts. It’s a decision that will affect homeowners for several years and could lead to thousands of dollars in mortgage interest savings. Historical context implies that mortgage rates will likely gravitate lower over the long term, to a historical trend in the mid-high 3% range. To help determine mortgage rate forecasts, one of the best perspectives we have available are historical ones. Both the great recession of 2008 and during the covid pandemic, the financial systems and economy as a whole required massive economic bailouts to rebound the economy. Thankfully, the stimulus did its job and interest rates remained low accordingly. What does this mean for mortgage rates? What goes up to slow the economy will eventually come down to stimulate the economy.  

While variable rate mortgages are directly affected by the central banks decisions, we will likely see fixed rates generally trend lower in 2024. Because fixed rates are tied to the Government of Canada Bond Yields and Bond Yields trade in anticipation of central bank rate decisions, we will likely see rates flow lower. 

Fixed vs. Variable Mortgage Rates

Mortgage loans come in two primary forms – fixed rate and adjustable, or variable rate.  

The interest on a fixed rate mortgage is fixed for a chosen duration of 6 months, 1, 2, 3, 4, 5, 6, 7, or even 10 years, depending on how long the term is locked in for. The rate will stay the same regardless of fluctuations in the key interest rate.

The interest rate on a variable rate mortgage may change monthly, every six months, annually or less depending on the terms of the mortgage. With this homebuyers indeed to be aware that the monthly costs of their mortgage payments can increase as interest rates increase, and similarly costs may decrease when interest rates decrease. 

Contact Prime Mortgage Works for Your Victoria Mortgage

With a rate hold and impending decreased interest rates coming, it’s important to do a mortgage check and ensure that you are not paying more interest than needed. 

Your Victoria mortgage broker at Prime Mortgage Works knows all the ins and outs of lending services available, each lender and banking institution’s different interest rates and spends a considerable amount of time researching the housing and economic markets so you don’t have to do the leg work. It is more important now than ever before to have the power of a mortgage broker on your side.  

Contact Prime Mortgage Works today to learn about securing your mortgage in Victoria.