Unless you’ve been living under a rock, you’ve probably heard a bunch of talk about the Bank of Canada and its interest rate in 2024. That’s because homeowners and aspiring house-hunters alike have been watching the national rate to secure the best mortgage (or mortgage renewal) possible.
But as the Bank of Canada eyes its next potential interest rate drop in December, what does that mean? And more specifically, what does it mean for you if you’re trying to buy your first home? Read on to learn more.
What Is the Bank of Canada Interest Rate?
The Bank of Canada interest rate, also called a policy interest rate, is the rate that sets the rest of the interest rates in the Canadian economy. The bank uses it to control inflation and rising or falling markets. If the interest rate increases, buying something like a new car or taking out a loan becomes costlier. Naturally, it also affects the price of mortgages.
While some debate surrounds the topic, the ideal inflation rate for a strong economy is around two per cent. So, as the market continues to sort itself out post-pandemic, the Bank of Canada continues to adjust its interest rate.
The Bank of Canada Drops Interest Rates
It was big news in October when the Bank of Canada dropped its rate by 50 basis points, down to 3.75 per cent. That was the fourth interest rate cut this year, following three 25-basis point cuts throughout 2024.
There is one more Bank of Canada interest rate announcement coming in December. Currently, it’s expected the bank may cut the rate further, however its final decision will align with whatever the current inflation is.
“With inflation now back around the 2 per cent target, the Governing Council decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to the middle of the 1 per cent to 3 per cent range. If the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further,” the bank revealed in its last announcement.
Related: A Complete Guide to Navigating Interest Rates in Canada for 2024
How Does the Lower Interest Rate Affect Me?
While decreasing interest rates may seem like good news for home buyers, the recent drop doesn’t exactly translate because it doesn’t affect fixed rates. Instead, fixed rates are based on the bond market, which is the market that covers government and corporate debt securities. It doesn’t usually move too much when the Bank of Canada cuts rates but tends to lower when things remain steady. Other factors that can influence bond yields, and therefore fixed rates, are the economy and international news.
So, if you’ve been waiting for the Bank of Canada to drop interest rates before securing a mortgage, you might not see any more big changes before the end of the year. The good news is that at least fixed interest rates are lower than they were this time last year.
Where the dropping interest rates make a bigger difference is with variable rate mortgages. If you have one, these cuts directly influence what you pay. So, if you’re looking at purchasing a property and considering your options, be sure to speak with your bank or mortgage broker about which type of mortgage makes sense for you.
Related: How the Bank of Canada Interest Will Affect Home Buyers in 2024
Prime Versus Policy
It’s important to note that while the Bank of Canada determines the policy rate, banks and lenders use something called a prime rate to determine their interest rates. If you’re eyeing a variable rate mortgage, be sure to check out prime rates over the next little while to get a good grasp of what you might pay as the market fluctuates.
How Much Has the Bank of Canada Dropped Interest Rates?
Although the fixed interest rates aren’t as low as they were years ago, it’s unclear if or when they will ever go that low again. Instead, you may be relieved to know that first-time homebuyers can get a mortgage under the five per cent mark while taking advantage of some of the first-time homebuyer incentives the federal government offers.
