Real estate news – The impact of falling interest rates on the real estate market

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July 4, 2024

Key facts:

Variable interest rates: Variable interest rates benefit directly from Bank of Canada rate cuts, offering potential savings and flexibility. However, they carry the risk of fluctuation, which calls for flexible budget planning.
Fixed interest rates: Fixed interest rates offer long-term stability and predictability, which is particularly advantageous in an uncertain market. They are influenced by government bond yields, which are currently stable.
Impact of government bonds: Government bond yields have a direct impact on fixed mortgage rates. Stable yields mean predictable fixed rates.
Buyer sentiment: Lower interest rates have revitalized the real estate market, increasing buyer optimism and stimulating transactions. A slight rise in prices is expected due to increased demand.
Buying strategies: For variable rates, it’s crucial to follow the Bank of Canada’s announcements and maintain a flexible budget. For fixed rates, we recommend that you compare lenders’ offers and choose a fixed term that suits your long-term plans.
Tips for 2024: Compare offers from several lenders, take into account your long-term plans and consider additional fees. Track bond yields to anticipate future trends in fixed rates.

Interest rates are at the heart of every real estate buyer’s concerns in 2024. Understanding their impact can make all the difference to your purchasing and financing decisions. This article explores the effect of Bank of Canada decisions on mortgage rates, in particular the distinction between variable and fixed rates, and their influence on the Canadian real estate market.

Time needed: 8 minutes

Understanding mortgage interest rates
Variable vs. fixed rates
The role of government bonds
The impact on the real estate market in 2024
Tips for real estate buyers in 2024

Interest rates play a crucial role in the real estate market. With recent decisions by the Bank of Canada, it’s essential to understand how these changes may affect your financing and purchasing choices in 2024.

Kyle’s video explains it all

Understanding mortgage interest rates

Mortgage interest rates determine the cost of your mortgage. They can be fixed or variable, each with different implications for your monthly payments and purchasing strategy.

Defining mortgage interest rates and how they work

A distinction is made between fixed and variable interest rates:

Fixed rate: The rate remains constant throughout the term of the loan.
Variable rate: The rate may fluctuate according to the decisions of the Bank of Canada.

Impact on monthly mortgage payments

The consequences also vary in terms of monthly mortgage payments:

A fixed rate offers stable, predictable payments.
A variable rate may offer lower payments initially, but with a risk of fluctuation.

Example: A 5-year fixed-rate mortgage at 5% means that if you borrow $300,000, your monthly payments will be approximately $1,750 for the duration of the loan, provided the loan terms remain unchanged.

Variable vs. fixed rates

Variable rates

Variable rates are directly influenced by decisions made by the Bank of Canada.

When the central bank decides to cut rates, variable-rate mortgages generally see their rates fall almost immediately.

Advantages:

Potential savings: In times of falling interest rates, borrowers can benefit from lower monthly payments.
Flexibility: If rates fall further, borrowers see their payments decrease.

Disadvantages :

Fluctuation risk: Rates may rise, resulting in higher monthly payments.
Uncertainty: Fluctuations can make long-term financial planning difficult.

“Variable rates can offer significant savings in times of falling rates, but they require a tolerance for risk.”
Kyle Shapcott, Leader in real estate.

Fixed rates

Fixed rates are based on government bond yields. They offer stability and predictability that variable rates cannot.

Advantages:

Stability: Monthly payments remain constant throughout the term of the loan.
Predictability: Facilitates long-term financial planning.

Disadvantages :

Less flexibility: Borrowers can’t take advantage of rate cuts.
Potentially more expensive: Fixed rates are often higher than initial variable rates.

Example: Suppose you have a mortgage of $300,000 at a variable rate of 4%. If the Bank of Canada cuts rates, your rate could drop to 3.5%, reducing your monthly payments. On the other hand, with a fixed rate of 5%, your payments remain stable, but you don’t benefit from rate cuts.

The role of government bonds

What are government bonds – definition

Government bonds are debt instruments issued by the government to finance its spending. These bonds have yields that directly influence the fixed mortgage rates offered by financial institutions.

Impact and relationship with mortgage rates

There is a direct relationship between government bond yields and fixed mortgage rates. When bond yields rise, fixed mortgage rates tend to rise too, and vice versa.

Example :

Period	Bond yield (%)	Fixed mortgage rate (%)
Q1 2023	1.5	6.0
Q4 2023	1.4	5.8
Q2 2024	1.3	5.0

When bond yields are stable, this generally translates into stable fixed mortgage rates. For example, if bond yields remain around 1.3%, fixed mortgage rates can remain close to 5%, offering borrowers a degree of predictability.

“Understanding the influence of bond yields on fixed rates can help buyers anticipate market movements.”

Valérie Lacasse, Leader in real estate

Impact of falling interest rates on the real estate market in 2024

Impact on the Canadian real estate market 2024

Recent decisions by the Bank of Canada to lower interest rates have had a significant impact on the Canadian real estate market.

Variable rates: The fall in interest rates stimulated variable-rate purchases. Borrowers benefited from lower mortgage payments, which increased their purchasing power and stimulated the real estate market.
Fixed rates : With government bond yields remaining stable, fixed mortgage rates also saw little fluctuation, remaining around 5%. This offered predictability to borrowers who preferred constant payments.

Impact on buyer sentiment

Buyer optimism has increased with the fall in interest rates, stimulating real estate transactions. Buyers are more inclined to enter the market, which has led to an increase in the number of transactions.

Rate forecasts

For the remainder of 2024, fixed rates are expected to remain stable at around 5%, due to constant bond yields.

However, a slight rise in property prices is expected due to increased demand.

To keep abreast of the current state of the real estate market, read our monthly analyses:

Consequences for buyers

There are several consequences and courses of action to adopt depending on the nature of your rates (fixed or variable):

Rate type	Description	Advantages	Disadvantages	Strategy
Variable	Buyers should take advantage of current low rates while planning for a possible future rise. It’s essential to keep abreast of the Bank of Canada’s decisions and be ready to adjust your budget accordingly.	Potential savings, flexibility	Fluctuation risk	Follow the Bank of Canada’s announcements, maintain a flexible budget
Fixed	Securing a fixed rate can offer long-term stability, particularly beneficial in an uncertain market.	Stability, predictability	Less flexibility	Compare lenders’ offers, choose the right term period

Tips for real estate buyers in 2024

Taking advantage of current conditions

To maximize the benefits of current market conditions, buyers should carefully evaluate their options between fixed and variable rates. Here are a few tips to help you make the right decision:

Evaluate the options: Compare the advantages and disadvantages of fixed and variable rates according to your financial situation and risk tolerance.
Check bond yields: Keep an eye on bond yields, as they can give you an indication of future trends in fixed rates.
Compare offers: Don’t settle for the first mortgage offer. Compare offers from several lenders to get the best possible rate.

Strategies for variable-rate mortgages

Follow Bank of Canada announcements: Stay informed about Bank of Canada decisions, as they have a direct impact on variable rates.
Plan a flexible budget: Make sure you have an emergency fund to cover any increases in mortgage payments.

Example: If the Bank of Canada raises interest rates, your monthly mortgage payment could increase. Make sure you have an emergency fund to cover this increase.

Tips for fixed-rate mortgages

If you have or wish to borrow with a fixed rate, here are our tips:

Compare lenders’ offers: Search and compare offers from different lenders to get the best possible fixed rate.
Consider the duration of the fixed term: Choose a fixed term duration that corresponds to your long-term plans. For example, if you plan to stay in your home for several years, a fixed term of 5 or 10 years could be advantageous.

Strategies for variable-rate mortgages

Follow Bank of Canada announcements: Stay informed about Bank of Canada decisions, as they have a direct impact on variable rates.
Plan a flexible budget: Make sure you have an emergency fund to cover any increases in mortgage payments.

Example: If the Bank of Canada raises interest rates, your monthly mortgage payment could increase. Make sure you have an emergency fund to cover this increase.

Tips for fixed-rate mortgages

Compare lenders’ offers: Search and compare offers from different lenders to get the best possible fixed rate.
Consider the duration of the fixed term: Choose a fixed term duration that corresponds to your long-term plans. For example, if you plan to stay in your home for several years, a fixed term of 5 or 10 years could be advantageous.

“A fixed rate can offer long-term peace of mind, especially in an uncertain market.”

Kyle Shapcott, Leader in real estate

Conclusion

The Bank of Canada’s decisions have a significant impact on the real estate market. In 2024, it’s crucial to understand the dynamics between fixed and variable rates, and their influence on your purchasing decisions.

Follow the Lacasse Shapcott team to stay informed and make informed decisions with our Montreal real estate team.

For more real estate news and advice, check out our blog, follow us on Instagram and read our Buyer’s Guide and Seller’s Guide.

Kyle Shapcott

kyle@equipels.com

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Kyle has been an expert on the real estate market for over 10 years. He is passionate about Montreal and the city’s real estate sector, and regularly shares his analysis and advice in his articles.

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