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Prime Rate drops to 6.70%: 2nd Reduction within 8 weeks

Writer's picture: Neil JosephNeil Joseph

Your Mortgage Newsletter

Welcome to the 5th edition of our Mortgage Newsletter for 2024!


At 9:45 am this morning, the Bank of Canada (BoC) delivered a much-anticipated rate drop, decreasing its Policy Rate by 0.25% (from 4.75% to 4.50%). This marks the second consecutive rate drop in two meetings, bringing the Prime Rate to 6.70%.


For those with variable rate mortgages or loans, this translates to a reduction in monthly interest costs of approximately $20.83 for every $100,000 of debt (or cumulatively $41.67 each month for every $100,000 of debt). However, if you are in the market for a new home or to refinance an existing mortgage, there will be little to no improvement in your eligibility to secure a higher mortgage amount.


So, what prompted the Bank of Canada to make this decision? Below are the recent economic updates that likely influenced this move:


Consumer Price Index (CPI) continued its path downwards:

  • May: CPI YoY at 2.90%, up from 2.70% in April

  • June: CPI YoY at 2.70%, down from 2.90% in May


GDP growth remains weak:

  • April: MoM growth of 0.3% vs. 0% in March


Employment growth losing steam:

  • May: Economy added 26,700 jobs, primarily part-time, with number of full-time jobs decreasing. Unemployment rate rose to 6.2% from 6.1% (April).

  • June: Economy lost 1400 jobs overall, primarily full-time, with fewer part-time additions to make up. Unemployment rate rose to 6.4% from 6.2% (May).


If this trend of softening economic activity continues, we may see another 0.50% to 0.75% cumulative reduction in the Prime Rate before the end of 2024, with potential 0.25% reductions at each of the BoC’s remaining three meetings this year. Hopefully, the Prime Rate might drop below 6% before 2025 begins.


Mortgage Market Insights

  • Bond Yield and Fixed Rate Spread: The spread between bond yields and fixed rates continues to narrow but remains higher than the long-term average. This spread should decrease as organic demand for mortgages increases.

  • Fixed vs. Variable Rates: Variable Rate mortgages are still priced higher than Fixed Rate mortgages, but the gap is narrowing. Currently, there is a 1% to 1.35% difference, indicating significant scope for reduction.

  • Variable Rate Discount: Variable rates are priced at a "discount" to the Prime Rate, but these discounts are currently lower than the long-term average. We can expect these discounts to increase over the next 12 to 18 months as demand for these products rises.

  • Betting on Prime Rate: Borrowers opting for new variable rate mortgages or remaining with variable rate mortgages are betting on a decrease in the Prime Rate by at least 1% within the next 12 months, making it a favorable option over 3-year Fixed options. The probability of this appears to be quite good right now.



What Should You Do?

  • 3-year Fixed Rate Mortgage: This offers immediate relief from higher payments for those currently in a Variable Rate Mortgage and unable to wait longer. However, those with flexibility in their monthly budget or without qualification challenges may choose a Variable Rate mortgage, as it would likely be more cost-effective over the next 3 years.

  • Mortgage Renewal: A 3-year Fixed Rate mortgage allows borrowers renewing their mortgage to avoid relatively higher payment associated with Variable Rate options. It also provides the flexibility to renew sooner, potentially securing a lower rate at the end of 3 years as compared to committing to a longer 5-year Fixed term.

  • Fixed Rate Mortgage Considerations: If opting for a Fixed Rate Mortgage, be sure to review the terms closely. A significant drop in interest rates could make it very costly to exit the mortgage before the end of the term as penalty will increase substantially.


For detailed insights, keep reading...


Mortgage Interest Rates

Presently, the 5-year bond yield stands at 3.368%, nearly 18 bps lower than 3.534% reported in our last communication on June 5th, 2024. Yields have dropped significantly from the peak of 4.461% (briefly on 2nd Oct 2023) and have dropped to levels briefly seen in Dec 2023 (before increasing) and between Sept 2022 to May 2023 (when they were on the initial ascent).


To offer you a visual insight into evolving trends, we've included charts below. These charts illuminate the trends of various aspects associated with mortgages with a 5-year term, be it Fixed or Variable.


For those unfamiliar with terms like Insured, Insurable, Uninsured, or Rental, a concise explanation is provided at the bottom for your reference.


Note: The rates indicated below are the most commonly available rates for Prime borrowers. Many Qualified borrowers secure a lower interest rate than depicted below due to superior credentials. Interest rates with B-lenders and Private mortgages are at a premium to these levels.

Trend - 5-year Fixed Mortgage Rate

The charts above show the trend in interest rate2 for Fixed Rate Mortgage types for the last 34 months or so.  For the shorter term (1-3 year) Fixed rate mortgages, the rates continue to be at a premium to corresponding 5-year rates. 



Spread - Fixed Rate Vs. Bond Yield (5-year)

Above chart shows the spread between the 5-year Canada Bond yield and 5-year Mortgage (Fixed rate).  This spread has been larger than usual for the 24 months or so, but we seem headed back to the average which is around 0.75% to 1.50% depending on the kind of mortgage. 


Trend - 5-year Variable Rate Mortgage Rate

The charts above show the trend in interest rate2 for Variable Rate mortgage types for the last 34 months or so.  


Trend of Discount to Prime - Variable Rate Mortgage

A higher discount on the chart generally signifies a heightened demand for Variable Rate mortgages. It reflects the dynamic interplay between borrower preferences and the response of lenders to this demand. Conversely, a lower discount may indicate a market shift towards Fixed Rate products.


Spread - Fixed Vs. Variable Rate Mortgage Rate

Generally, Fixed rate mortgage rates are higher than their corresponding Variable Rate mortgages at the time of securing one but currently we are in a phase where the relationship is inverse.  This typically happens when the interest rate trend is under reversal.  There is no guideline as to how long such an inverse relationship can persist but in "normal" times this period is limited to couple of months at best.  This inversion has persisted for about 20 months now. 


Note: If you need help with your financing options, are interested in working with me or want to learn more about my services, please don't hesitate to get in touch. I'd be happy to chat! Schedule meeting per your convenience here.


1. Explanation of key terms

Insured – These mortgages are backed by a mortgage insurer like CMHC and borrower needs to pay an insurance premium.  All properties purchased with less than 20% downpayment fall under this category and come with an amortization of 25 years or lower and purchase price cannot be higher than $1M.

Insurable – These mortgages require the borrower to have a downpayment of 20% or higher, amortization is restricted to 25 years or lower and purchase price cannot be higher than $1M.

Uninsured – These mortgages require the borrower to have a downpayment of 20% of higher but amortization can be 30 year or lower and purchase price can be higher than $1M.

Rental – These mortgages are specifically for Rental or Investment properties and need to have a downpayment of 20% or higher but come with amortization of 30 years (with most lenders) and purchase price can be higher than $1M.



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