BoC Interest Rate Cut: Will an XL Cut Rouse the Market?

The Bank of Canada’s first three whacks at the overnight rate — 25-basis point cuts in June, July and September — weren’t enough to juice the housing market in a meaningful way.

Today’s 50-basis point rate cut is far more aggressive. Partially a reaction to a 1.6% annual inflation rate increase in September, this super-sized cut seems geared toward sparking economic growth in the waning months of 2024.

A slight rise in home sales might fulfill the Bank’s expectations to some extent, but this cut isn’t likely to trigger a watershed moment for the housing market.

Other challenges, and a looming set of mortgage rule changes, might keep buyers on the sidelines a while longer.

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What today’s rate cut will do: Lower some mortgage rates

Slashing the overnight rate by 50 points is no joke where variable mortgage rates are concerned. Once the cut is absorbed by the nation’s lenders, we may see variable rates around 4.8% — the lowest they’ve been since December 2022.

That’s still about 0.8% higher than today’s best three- and five-year fixed rates, so it’s not as if buying power will get an across-the-board boost. Someone wanting a variable-rate mortgage will still have to pass a stress test with a qualifying rate of at least 6.8%, and that’s a best case scenario.

Buyers who can manage the stress test and afford current variable rates may feel like now is an opportune time to get into the market. Supply is building and demand is fairly tepid, giving buyers more bargaining power than they’re used to.

Paying a little more for a variable while the market’s quiet could also be seen by some buyers as a short-term opportunity cost: Your monthly mortgage payment will be higher today than if you wait for another rate cut, but how much more would your mortgage cost if the next cut ignites the market and the home you want is the target of a bidding war?

When what-if’s of this nature are running through buyers’ minds, it can be hard to pull the trigger on a home purchase. Sales might not spike in the next few weeks, but the number of calls mortgage brokers receive definitely will.

What today’s rate cut won’t do: Speed up mortgage rule changes

Home buyers in Canada’s priciest markets — Toronto, Vancouver and Victoria — probably have December 15 circled on their calendars. That’s the day the country’s new insured mortgage limit goes into effect.

Once the new limit is in place, homes priced in the $1 million to $1.5 million range will be eligible for mortgage default insurance, and will no longer require a 20% minimum down payment. The minimum down payment for a $1.5 million home, for example, will drop from $300,000 to $125,000.

Let’s say you’re a buyer in a market where detached, semi-detached and townhouse properties regularly sell for over $1 million. Your income is decent and you can afford a mortgage at today’s rates, but you “only” have access to a $100,000 down payment, not the $200,000 lenders currently require.

In this scenario, you might have to hold off on buying a home until those down payment requirements are slashed. Mortgage rates are not your primary pain point, and the Bank of Canada can’t help you.

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What today’s rate cut can’t do: Change financial reality

Home buyers aren’t only hemmed in by high rates and inflation-eroded savings. They’re also carrying large debt loads and falling behind on their debt payments, both of which can severely limit their mortgage options.

According to Equifax Canada’s latest Market Pulse, Canadians carried an average non-mortgage debt of $21,649 in the second quarter of 2024. That kind of debt can wreak havoc with a borrower’s debt service ratios, and disqualify them from getting insured mortgages with smaller down payment requirements.

Consumers are also falling behind on debt repayments, which lowers credit scores and sends up red flags for lenders. Canada’s non-mortgage delinquency rate surged by more than 23% in Q2, hitting its highest level since 2011.

A Bank of Canada rate cut will ease some of those debt burdens. Variable-rate auto loans and lines of credit, for example, will be less expensive. But it might be a while before indebted consumers can claw themselves back to where lenders want them to be.