On January 24, 2024, the Bank of Canada announced it would be holding its overnight lending rate steady at 5%.
The Bank of Canada announced on January 24 that it would be holding its overnight interest rate steady at 5%, which is prompting economists with TD Economics to forecast that the first rate cut since the early days of the COVID-19 pandemic may be coming as early as Spring 2024.
Throughout 2023, persistent inflation and the Bank of Canada's moves to adjust interest rates generated headlines.
Many Canadians, especially first-time homebuyers and existing homeowners looking to renew their mortgage, have been watching the central bank's rate decisions carefully, as they may affect the rate at which Canadian banks can lend money for loans like mortgages.
Not only did the Bank of Canada hold the interest rate steady, but TD Economics wrote in a report on Wednesday that it now expects the central bank to begin cutting its overnight rate as early as April/June.
In a separate report last week – entitled 'That First Canuck-cut Will Be a Doozie' – TD Economics stated that core inflation (which is the rate of inflation on all goods and services except food and energy) is cooling, while shelter inflation (which relates to housing) remains high.
Despite this, TD Economics anticipates the Bank of Canada will cut rates beginning this Spring to mitigate deepening recession risks if interest rates are left too high for too long.
"The Bank of Canada is expected to start cutting its policy rate this Spring, despite inflation remaining above the target, and shelter inflation likely still running hot," TD SVP and Chief Economist Beata Caranci, and James Orlando, Director & Senior Economist, wrote in their report last week.
"This will create a communication challenge [for the Bank of Canada] in anchoring household inflation expectations, which are already elevated and tend to outweigh housing cost pressures. There is already evidence that the inflation cooling process is widening to more products," Caranci and Orlando wrote.
What this means is that aspiring homeowners, and existing homeowners whose mortgages are up for renewal this year, will be watching the Bank of Canada's upcoming decisions carefully in the hopes that the central bank decides to cut its rate, which would hopefully result in lower interest rates, and potentially better mortgage rates.
Why homeowners are watching the Bank of Canada's rate decisions
For more than two years during the COVID-19 pandemic, the Bank of Canada left its overnight lending rate at 0.25%. However, in March 2022, amid rising inflation and the outbreak of war in Ukraine, the Bank of Canada raised its rate 25 basis points to 0.5%.
Since then, the Bank of Canada has raised its rate several times in an effort to help combat rising inflation, culminating in July 2023, when the overnight lending rate hit 5%. Since then, the Bank of Canada has held the rate at 5%.
The Bank of Canada's interest rate policy has an impact on the rate at which all Canadian banks will lend money to businesses and individuals, which includes mortgage rates.
For TD, the Bank of Canada's overnight lending rate may affect the TD Mortgage Prime Rate, which is the variable annual interest rate used as a reference by TD to determine the interest rate charged on its variable-rate mortgages, as well as the TD Prime Rate, which is used to determine the interest rate of various other types of TD loans.
Many Canadian homeowners have been watching the Bank of Canada's rate decisions carefully. That's because for many Canadian homeowners whose mortgages are up for renewal in the next few years, interest rates are much higher than they were when they purchased their home or last renewed, which means their mortgage payments could go up.
What could potential Bank of Canada rate cuts mean for homeowners and buyers?
But with rate cuts potentially on the horizon, it could mean mortgage payments may not go up quite as high as once thought for many Canadians.
"Over the past year we've seen interest rates increase dramatically, and for many Canadians, this has impacted home prices and affordability," said Natasha Struminikovski, Associate Vice President, Homebuyers Journey, TD.
"Given the evolving market, we encourage all potential homebuyers to start the process early and seek trusted advice to navigate the changing landscape.”
According to Struminikovski, changes in interest rates may impact home and rent prices and could therefore impact what Canadians can afford. "While not a hard and fast rule, and while many variables factor into this, we have seen increases in demand for property and higher prices when interest rates are low, and the opposite when they are high," Struminikovski said.
"If you already own a home, changes in interest rates could mean changes to your monthly payments if you have a variable rate mortgage. If you have a fixed rate mortgage, it could mean changes to your monthly payments when you renew."
Struminikovski said that for anyone who has taken out a TD mortgage in the last 3-4 years, given more recent increases in rates, their interest rate could be higher when it's time to renew.
"As a result, you may want to review your options to determine if your mortgage situation can continue to suit your individual short and long-term financial goals," said Struminikovski.
For TD mortgage customers who are looking at a renewal this year, a TD Mortgage Specialist can help you understand what you can afford and what your financing options are. "TD Mortgage Specialists are available to chat in branch, or over the phone. Even an initial conversation can be beneficial to help you move towards your home ownership aspirations," Natasha said.