The Bank of Canada (BoC) made a jumbo-sized cut on Wednesday morning, lowering the policy interest rate from 4.25 per cent to 3.75 per cent.

This was the fourth announcement of 2024. Such a low has not been seen since December 2022.

At first, experts expected a 0.25 per cent rate cut, but after the Consumer Price Index (CPI) fell below the Bank's target of 2 per cent earlier in October, hopes about a bigger cut strengthened.

"Inflation in shelter costs remains elevated but has begun to ease. Excess supply elsewhere in the economy has reduced inflation in the prices of many goods and services. The drop in global oil prices has led to lower gasoline prices," the BoC shared.

"These factors have all combined to bring inflation down. The Bank's preferred measures of core inflation are now below 2.5 per cent. With inflationary pressures no longer broad-based, business and consumer inflation expectations have largely normalized."

Bank of Canada reduces policy rate by 50 basis points to 3¾%https://t.co/aUmYh7ac0e#economy #cdnecon

— Bank of Canada (@bankofcanada) October 23, 2024

Now, more frequent rate decreases are expected. Only one announcement is scheduled for the rest of the year, on December 11.

The BoC lowered its key interest rate to 4.25 per cent in September, marking its third rate cut of the year.

In June, the Bank 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.

Another quarter-point cut followed in July, bringing the rate to 4.5 per cent.

"A 50-basis point decrease is a significant drop, and we may see some pickup in the market after the announcement. However, many buyers may still choose to wait until the overnight rate announcements in October or December to make a move," Victor Tran, mortgage and real estate expert at Ratesdotca, stated in an email before the announcement.

"Buyers are holding out for the bottom of the market. The challenge is that no one can predict when that will be, and once the market shifts, it's likely it will heat up quickly and push up house prices. If buyers wait too long, they may find themselves trying to buy with a lower mortgage rate, but higher house prices."

Tran believes the renewal market will benefit from a steep rate decrease, and a 0.5 per cent drop will be "a welcome relief to those renewing in the next 12 to 24 months."

"Regulatory changes that eliminate the stress test for uninsured mortgages changing lenders at renewal, which are expected to be announced on November 21, will also benefit this segment," he shared.

How the BoC decision affects mortgages

Experts at Ratehub.ca explained 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 downpayment 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.

Penelope Graham, mortgage expert at Ratehub.ca, told us that with rates changing so frequently, it's a volatile time to shop for a new mortgage or to be coming up for renewal.

"It's important for borrowers to explore all of the rate options available to them in the marketplace and assess what type of rate, term, and length would be most advantageous," she advised. "Working with a mortgage professional is key when establishing your personal rate strategy when rates are trending lower."

Per her analysis, even though there isn't a dramatic surge, solid evidence shows that homebuyers across Canada are responding to recent rate cuts.

"The latest national sales numbers indicate both a monthly and annual uptick.

However, given expectations have now shifted to larger rate cuts in coming months, buyers may resume a wait-and-see approach to see how much further borrowing costs will fall."
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