Make Sense of BOC Interest Rate Cut

As you probably already know the Bank of Canada reduced its overnight lending rate by 0.25%. Since then there have been many articles and TV news stories analyzing this situation to no end. There is still a lot of confusion and uncertainty amongst the general public however.

I’m going to break it down for you here and remove some of the confusion.

Why?     

• This announcement has nothing to do with real estate market or mortgages (they are impacted by it but are not the reason for it)
•  Oil Prices: To counteract the recent drop in oil prices. Protecting more Canadian jobs and tax revenue
• Canadian Dollar: Lower interest rate has a lowering effect on the Canadian dollar making Canadian goods more affordable in the world market
• Spending: Lower interest rates stimulate spending especially in businesses, generating more jobs, tax revenue.

What Does It Mean? 
Now that we know the main reasons as to why the Bank of Canada made this announcement, let’s take a look at how it affects you.

Before we go further remember this:

A 0.25% change in interest rate is not going to make or break a market and it should not be the deciding factor in buying a home or not.

With that out of the way, let’s look at some common situations/questions that apply:

Buying a personal residence 
The key question is: can you afford the monthly payment comfortably? If the answer is No, then regardless of the interest rate it is likely not a good time to make a purchase.

If you can afford the monthly payments comfortably, what would your answer be if the interest rates went up to 5% or 6%?

If the answer to both of the questions above was yes, you should feel more comfortable about purchasing a personal residence.

What about the price? Just like any other investment the price may go up and it may go down, in fact since it’s a cycle, by definition it will do that to some degree. If you are not planning to sell right away or are not time boxed in how long you are living in your new home, the price should not be a big issue. Remember that if the value your home increases or drops your payments remain the same. As long as you are comfortable paying the payments you are in a good shape.

Selling a property
With lower interest rates more buyers can more easily afford purchasing a property. This will natural lead to an upwards pressure on housing prices. This announcement also aligns with the heated spring real estate buying season. If you were planning on selling, this may provide the extra incentive for buyers to write you a better offer.

Refinancing 
The rate announcement coincides with the mortgage rate wars that occur during the spring season. The spring cycle, provides a great opportunity for new mortgages, refinancing, and mortgage renewals.

As always, ensure the mortgage terms you are getting align with your goals and objectives. Some mortgages may provide a lower rate than others but may come with string attached.

What should I do? 
A .25% change in the interest rate should not change your plans or activities. If this change impacts your ability to get financing, it may not have been the right option from the beginning. The main thing to do is stay calm and carry on. If you were planning on buying, selling, refinancing, renewing go on as before but take this change into account. Review your finances and maybe you can take advantage of the situation. The change in interest rate may influence your decision but should not drive it.