What you need to know about Falling interest rates

A decrease of another quarter of a percentage point in the central bank’s trendsetting rate will translate into only marginally lower variable mortgage rates. And it’s possible it won’t have much impact at all on the bond market, which influences the level of fixed mortgage rates.

However there’s another aspect of fixed-rate mortgages that homeowners and homebuyers should keep in mind when interest rates are falling: prepayment penalties.

Whatever your reason for wanting to get out of your mortgage early – usually it’s moving, divorce or financial difficulties – your lender will charge you a fee that compensates it for the mortgage interest payments you won’t be paying.

For fixed-rate mortgages penalties are typically the greater of three months’ worth of interest (as for variable-rate mortgages) or what’s known as the “interest rate differential,” or IRD. The latter is calculated by taking into account your remaining balance and the difference between your original rate and the rate at which your lender can re-lend the money you’re paying off in advance.

So that means: IRD penalties tend to get larger when interest rate falls, as the difference widens between mortgage rates at the time you took out your mortgage and the rates available to new borrowers.

It’s something to keep in mind if you’re currently shopping for a fixed mortgage rate. The risk of large penalties isn’t in itself an argument against choosing a locked-in rate. But it is a reason to ask lenders how they calculate their IRD penalties. I’ve seen these penalties reach into the tens of thousands and in one case it was over $40k for one client of mine.

If you have to break your mortgage or thinking about breaking your mortgage and your lender is telling you about a massive penalty please let me know and I can connect with you with a great mortgage broker who may be able to help. Keeping more money in your pocket, whether buying, selling or even re-financing, is what I specialize in.

So What’s next

Now that the BoC has opted to cut rates in back-to-back announcements, Canadians are casting their gaze forward to the remaining three times the central back is set to update Canadians on its overnight rate this year, currently scheduled for September 4, October 23, and December 11. ​

TD Economics is predicting further rate cuts into 2025, because inflation and the job market are cooling. Recent data showed that inflation is at 2.7%, getting closer to the 2% target set by the BoC.

Any rate cut predictions are never easy as the BOC is always trying to find the balance between cutting too quickly and you risk inflation worsening; cut too slowly and you risk slowing growth more than necessary.

However TD and other major banks are thinking that “the central bank's policy rate to be cut below three percent by the end of next year.”

So, in other words, Canadians could see the current 4.5% overnight lending rate drop to 2.75% by the end of 2025.

Ok, but what should I do now?

As rates come down, we will see house prices slowly start to rise. Its not a matter of IF it’s a matter of WHEN. So if you are in the market to buy a home now is the best time to buy as prices are at the lowest they have been. Pair that with a variable rate mortgage so that as rates come down so will your rate (and if you have to break it the penalties are lower than fixed) and you will be able to maximize how much money you keep in your pockets. Remember, the purchase price of your home never goes up, it only goes down however rates change over time. You are better off to get a lower purchase price with a slightly higher rate now that will come down over time than waiting for a slightly lower rate but pay a higher price for the home.

If you are thinking about Selling the prices will start to go up however it will be slow and we may not see any real noticeable price increases until spring next year. Right now there are a lot of properties on the market compared to active Buyers. We are in what is called a Buyers market. As more buyers come into the market it will shift to a balanced market and that will help Sellers with price increases. Having said that the market is very dependent on your specific neighbourhood. Some homes are selling quickly whereas the same type of home a few streets over is not selling. So if you can wait to Sell your home you will have a better chance of making more than if you sell now. I’m a real estate agent telling you now is not the best time to sell your home. How often do you hear that… 😊

If you’re thinking about Buying or Selling please reach out and I will be happy to go over your specific situation and what your best options are to maximize the money you keep in your pocket.

What you need to know about Falling interest rates