When will Bank of Canada lower its interest rate? Here's what to expect

When will Bank of Canada lower its interest rate? Here's what you can expect

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The Bank of Canada announced its first interest rate update of 2023 on Wednesday, increasing the key overnight rate to 4.5% in order to curb inflation pressures on the country.

Last year, it hiked the interest rate seven times for the same reason.

Since the Consumer Price Index fell to 6.3% in December, some experts had initially predicted a rate hold. Experts are hoping this will be the last rate hike for a while, and only rate holds will follow for the rest of the year.

But now, Canadians are wondering if a decrease in interest rates will happen any time soon, so they can dream of buying a home again without an exorbitant mortgage over their heads.

A new rental market report released by the Canada Mortgage and Housing Corporation (CMHC) notes that rental housing vacancy is at a 22-year low, going from 3.1% to 1.9% just last year. One of the possible causes of this is high interest rates, which have pushed many aspiring homeowners to simply stick with renting for now.

James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender, weighed in on a possible interest rate dip in an email to Daily Hive.

“We can expect the Bank to now hold the key overnight rate throughout this year, unless they observe that we are not on track to get inflation down to 3% by the middle of 2023 and 2% in 2024,” he said.

Laird notes that the Bank currently believes that Canada’s core inflation has peaked, which has allowed it to consistently move towards new targets for 2023 and 2024. “If this happens, Canadians can expect rate holds and possibly rate drops in 2024.”

How will this affect Canadian homebuyers?

People who currently have a variable-rate mortgage or home equity line of credit (HELOC) can expect the rate hikes to pause and maybe even end altogether if inflation shows signs of slowing down.

“With this latest rate hike, more Canadians have reached their trigger rate, which means their existing mortgage payment is no longer covering their monthly interest,” Laird said.

If you’re looking for a fixed-rate mortgage this year, you can expect rates to plummet with inflation numbers in line with the Bank’s targets.

Laird advises those who currently require a mortgage and believe the Bank will drop its key interest rates this year or in early 2024 to consider a variable-rate mortgage, as they will decrease if rates drop.

“Canadians who think inflation is going to be more persistent than the Bank is expecting should lock into a five-year fixed mortgage rate since rates will move up if inflation is more stubborn than anticipated,” he notes.

That said, qualifying for a variable rate is no piece of cake. The rate hike on Wednesday has made qualifying for one even harder than it was last year.

“Today’s announcement should mean the floor for home values across the country is near,” Laird told Daily Hive. “Home values might drift higher as long as the key overnight rate has peaked.”

To illustrate what January’s Bank of Canada update will mean, here’s an Ontario-oriented example:

The average home price in Ontario was $812,338 in December, according to the Canadian Real Estate Association (CREA).

A homeowner who put a 10% down payment on an $812,338 home with a five-year variable rate of 5.30% amortized over 25 years (total mortgage amount of $753,768) now has a monthly mortgage payment of $4,514.

Wednesday’s 25-basis point rate increase will increase this homeowner’s variable mortgage rate to 5.55%, in turn increasing their monthly payment to $4,623.

By this calculation, the homeowner will pay an extra $109 per month, or an additional $1,308 per year, on their mortgage payments.

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Keeping all of last year’s rate hikes in mind, in January 2022, a homeowner who put a 20% down payment on a $1,019,300 (the average home price in Ontario at the time) with a five-year variable rate of 1.40% (the best rate available then) amortized over 25 years would have a monthly mortgage payment of $3,222 on their total mortgage of $815,440.

This homeowner’s variable mortgage rate will increase to 5.65% and their monthly payment will increase to $5,049.

This means that by January of 2023, the total impact year-to-date for the homeowner is $1,827 more per month, or $21,924 per year, on their mortgage payments — a whopping 57% increase.

Plan ahead by keeping an eye on the Bank of Canada’s announcements here. Fingers crossed that we hear good news at the end of 2023 or the beginning of 2024.