Navigating Bank of Canada Immediately after the Bank of Canada announced a rate cut of .25% in June, I received calls from some of my clients asking for advice and/or insight on how the rate cut might affect their mortgage or overall financial picture. With another announcement scheduled for July 24, I thought I’d share some perspective on how Bank of Canada rate changes might impact your financial decision-making. Many industry experts are predicting another rate drop – although they don’t agree on the exact number – and some are predicting that the next rate cut will occur in September. Let’s look at three hypothetical outcomes of the next rate announcement and what you should consider in each situation.
If Rates Decrease by .25%
FOR VARIABLE-RATE MORTGAGE HOLDERS:
Enjoy Lower Payments: If you have a variable mortgage with an adjustable payment, you’ll see a modest reduction in your payment and a little extra money in your bank account. If you have a variable mortgage with a fixed payment, your payment won’t change, but more of it will now go toward principal, helping you stay on track with repayment.
Pay Down Debt: For adjustable payment mortgages, using the extra cash flow to “treat yourself” might be tempting, but prioritizing debt repayment is definitely the smart decision here.
Pay Down Principal: For fixed payment variable mortgages, principal repayment is built in, but if you have an adjustable payment mortgage, consider using the extra money to make prepayments on your mortgage. This can help you pay off your mortgage faster and save on interest costs.
FOR FIXED-RATE MORTGAGE HOLDERS:
Consider Refinancing: Although a.25% decrease might not seem like much, it could be enough to justify refinancing, especially since rates have already dropped by.25% this year. If your current mortgage rate is higher, let’s touch base to review potential savings and costs.
Prepare for Renewal: If your mortgage renewal date is approaching, keep your options open. Don’t sign your lender’s renewal offer since you may be able to secure a lower rate. Start the process early to put yourself in the most advantageous position when it’s time to make decisions.
If Rates Decrease by .5%
FOR VARIABLE-RATE MORTGAGE HOLDERS:
Larger rate decreases lead to significantly lower payments for adjustable mortgages and increased principal repayment for fixed mortgages.
Aggressively Pay Down Debt: If you have an adjustable payment, use the extra cash to hammer down debt. I know it may not be the most fun, but your future self will thank you.
Aggressively pay down principal: Reduce your mortgage interest significantly by paying more on your adjustable payment mortgage now.
FOR FIXED-RATE MORTGAGE HOLDERS:
Strong Case for Refinancing: A .5% decrease combined with the .25% decrease in June presents a strong case for refinancing. Even after factoring in any penalties, the long-term savings might be considerable. I can review your situation and provide a thorough assessment so you can make an informed decision.
Secure a lower rate now: With renewal approaching, it’s a great time to lock in a better deal. Starting the process early ensures you don’t miss out on these favorable conditions.
If Rates Stay the Same
Both variable- and fixed-rate mortgage holders won’t see any changes in their payments. Prioritize budgeting, making extra payments to reduce the principal, and planning for renewal, even if years ahead. Understanding the market now can help you make informed decisions when the time comes.
Whether the Navigating Bank of Canada drops rates or holds steady, you can still optimize your mortgage and enhance financial health. Paying down debt or improving cash flow can help make your life significantly more comfortable very quickly. If you have any questions or need personalized advice, don’t hesitate to reach out. I’m here to help you navigate these changes with confidence.
