Posted On Dec 11, 2024

What the Bank of Canada’s Rate Cut Means for Variable-Rate Mortgage Holders

On December 11, 2024, the Bank of Canada made a significant announcement, reducing its policy rate by 50 basis points, bringing it to 3.25%. For homeowners with variable-rate mortgages, this decision has important implications, but how it affects you depends on the type of variable-rate mortgage you hold. Let’s break it down.

Types of Variable-Rate Mortgages

There are two main types of variable-rate mortgages:

  1. Fixed-Payment Variable-Rate Mortgages

  2. Adjustable-Rate Mortgages (ARMs)

While both are influenced by changes in the Bank of Canada’s policy rate, the impacts are different.

Impact on Fixed-Payment Variable-Rate Mortgages

If you have a fixed-payment variable-rate mortgage, your monthly payment amount stays the same, even as interest rates fluctuate. So, what changes with a rate cut?

  • More Principal Paid Down: With lower interest rates, a larger portion of your fixed payment goes toward paying down the principal of your mortgage, rather than covering interest. This helps you build equity in your home faster.

  • Trigger Rate Considerations: If rates had been rising, you might have been approaching your "trigger rate," where your payment is no longer enough to cover the interest. This rate cut provides relief by reducing your interest charges and lessening the risk of hitting that point.

Impact on Adjustable-Rate Mortgages

For adjustable-rate mortgage holders, the impact is more immediate.

  • Lower Monthly Payments: When the policy rate drops, the interest rate on your mortgage adjusts accordingly, and your monthly payment decreases. This can provide more room in your budget for other expenses or savings.

  • Cash Flow Benefits: Adjustable-rate mortgages are highly sensitive to rate changes, so you’ll feel the financial benefits of this rate cut right away.

Which Mortgage Type Benefits Most?

Both types of variable-rate mortgages benefit from the Bank of Canada’s rate cut, but the type of benefit varies:

  • Fixed-Payment Variable-Rate Mortgages: The benefit is long-term, as more of your payment goes toward reducing your principal, potentially shortening the life of your mortgage.

  • Adjustable-Rate Mortgages: The benefit is immediate, as lower payments give you greater short-term financial flexibility.

What Should You Do Next?

Regardless of the type of variable-rate mortgage you hold, this is a great time to review your mortgage strategy. Here are some steps to consider:

  1. Understand Your Mortgage Terms: Confirm whether your mortgage has a fixed payment or adjusts with the interest rate.

  2. Evaluate Prepayment Options: If your payment has dropped or more is going toward the principal, consider increasing your payments to pay off your mortgage faster.

  3. Consider Refinancing: With lower rates, you might explore refinancing options to align with your financial goals.

  4. Speak with a Mortgage Agent: A mortgage professional can help you understand your options and ensure your strategy is working for you.

Let’s Talk About Your Mortgage

If you’re not sure how this rate cut impacts you or you’d like to explore ways to optimize your mortgage, I’m here to help. Whether it’s paying down your principal faster, refinancing, or exploring other mortgage options, let’s make your mortgage work for you.

Contact me today to discuss your goals and create a plan that takes full advantage of the Bank of Canada’s latest rate decision.

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