Fixed Mortgage vs. Variable Rate Mortgage - What does the recent BOC rate drop mean?

The Bank of Canada announced a 25 basis point rate cut to the overnight rate on June 5th, 2024. This decision has raised questions about its impact on interest rates. It's important to understand that the fixed rate mortgage market and the variable rate mortgage market are influenced differently. Fixed rates are driven by bond yields, while variable rates are directly linked to the overnight rate.

Fixed Mortgage Rates

The recent 25 basis point rate cut by the Bank of Canada has a limited direct effect on fixed mortgage rates because:

- Fixed mortgage rates are primarily influenced by long-term bond yields, which respond to economic growth and inflation expectations.
- The rate cut could indicate further reductions in the future, potentially lowering bond yields and, consequently, fixed mortgage rates over time.
- Those renewing fixed-rate mortgages may not face significant rate increases, as rates may decrease slightly in anticipation of further cuts by the Bank.
- The immediate impact on fixed mortgage rates is minimal.

In short, the rate cut does not directly reduce current fixed mortgage rates but suggests a possible gradual decrease if the easing trend continues. This could improve affordability for those entering the housing market with a fixed-rate mortgage.

Variable Mortgage Rates

The 25 basis point rate cut directly affects variable-rate mortgages as follows:

- Variable mortgage rates decrease by approximately 0.25%, offering immediate relief on payments for those with variable-rate mortgages.
- For adjustable payment variable-rate mortgages, the monthly payment amount will automatically decrease.
- For example, a $500,000 variable mortgage might see a monthly payment reduction of about $75.
- For fixed-payment variable-rate mortgages, the interest portion reduces while the total payment remains the same, allowing quicker principal repayment.
- The rate cut may lead to further reductions in variable mortgage rates, providing more significant relief over time.

Overall, the 25 basis point decrease directly lowers variable mortgage rates and payments for those with adjustable variable-rate mortgages. For those with fixed-payment plans, it accelerates principal repayment. The cut also suggests more rate decreases could follow, potentially reducing variable mortgage costs further.

Which mortgage is best for you?

What type of mortgage suits you best? Everyone has different needs. Discuss your financial goals with a Homeguard Mortgage Agent. We will help you understand the advantages and disadvantages of each mortgage option and recommend ones that fit your financial plan.

What are the current Rates?

Due to fluctuating financial markets and different mortgage types, rates change often! Download our Mobile Mortgage App for an overview of current market rates or apply today to receive a complimentary in-depth quote and overview of current market conditions affecting the mortgage market.