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• Jun. 5, 2024

For the first time since the early days of the COVID-19 pandemic, the Bank of Canada (BoC) announced on June 5 that it would be cutting its overnight interest rate to 4.75%, down from 5%, the level it has maintained since July 2023.

While there was some speculation that the BoC might hold off on cutting its overnight lending rate until July, the central bank opted for a cut. The BoC's decision could have big implications for the Canadian housing market, especially if further rate cuts arrive later this year.

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 affect the rate at which Canadian banks can lend money for loans like mortgages.

Because the BoC’s benchmark rate serves as a reference point for the interest rates that financial institutions charge to their customers on products such as mortgages and loans, the BoC's decision means that people with variable rate mortgages – mortgages that fluctuate with rate hikes or cuts – could soon start to see some financial relief.

"The BoC didn't want to wait any longer to cut rates," TD Economist James Orlando said.

"The central bank saw its window to make a move and took it. This was made easier with market pricing moving towards a June cut over the last few weeks."

Now that the BoC has opted to make a cut to its overnight lending rate, all eyes are on the central bank's next scheduled announcement about its interest rate, which is scheduled for July 24.

Orlando said that this rate cut could be just the beginning of a larger trend from the BoC.

"We expect the BoC isn't done," he said. "We have the central bank cutting twice more in 2024, before continuing the cutting cycle throughout 2025."

A brief history of the Bank of Canada interest rate

For roughly two years during the COVID-19 pandemic, the BoC left its overnight lending rate at 0.25%. However, in March 2022, amid rising inflation and the outbreak of war in Ukraine, the BoC raised its rate 25 basis points to 0.5%.

Over the following year, the BoC raised its rate several times in an effort to help combat rising inflation, culminating in July 2023, when the overnight lending rate hit 5%. The BoC held that rate until today.

"With continued evidence that underlying inflation is easing, [The Bank of Canada's] Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points," the central bank wrote in a statement.

"Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain. Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians."

The BoC'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 BoC's overnight lending rate affects 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.

What does this rate decision mean for Canadians?

Now that the BoC has made its first change to its overnight rate in nearly a year, homeowners with a variable rate mortgage could see more of their money going towards the principal amount on their mortgage and less towards interest, Orlando says. That means a homeowner could possibly pay off their mortgage faster than in a higher rate environment.

For homeowners on a fixed rate mortgage, this rate cut may be helpful, but might not ease all affordability concerns.

According to Natasha Struminikovski, Associate Vice President, Homeowners Journey at TD, even if interest rates are starting to come down, people who have fixed rate mortgages that are up for renewal may renew at a rate that is higher than what they had before – especially if they secured a mortgage during the thick of the pandemic when interest rates were at historic lows.

“The rate situation in 2024 is different than it was a few years back,” Struminikovski said.

“If someone has a mortgage that is coming up for renewal, it's an important time for them to take stock of where they are financially and understand their mortgage options. This can help them to better understand how a rate hold, or rate cut, might impact them.”

Struminikovski recommends TD clients who have a mortgage coming up for renewal reach out to a TD Mortgage Specialist to help them understand their renewal options and how they might be impacted by a rate change.

For information on how to help prepare if your TD mortgage is coming up for renewal in the next 12 months, check out this article from TD Stories.

Likewise, homebuyers wanting to purchase a home and looking to understand how a rate change could impact their mortgage options can also reach out to a TD Mortgage Specialist. To learn what your mortgage payments might be, try the TD Mortgage Calculator, which can be found here.

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