Recent Developments in Canadian Mortgage Policies and Interest Rates
Recent Developments in Canadian Mortgage Policies and Interest Rates
Reza Ghazi serves as the CEO of GreenFlow Financial Corp, managing its operations and growth strategies.
The Bank of Canada has implemented a string of policy interest rate reductions since June 2024. In the final quarter of 2023, the policy interest rate, or target overnight rate, stood at 5%. The BOC eventually reduced the policy interest rate by 175 basis points in 2024, bringing it down to 3.25%.
Interest rates play a significant role in various sectors, including the mortgage industry. In response to rising inflation rates, the policy interest rate steadily increased from 0.25% in March 2020 to 5% in December 2023.
The current 3.25% rate is the result of a gradual decline, as the inflation rate, which hit an 8% peak in 2022, stabilized around the 2% target rate in 2024. The inflation rate, measured by the year-over-year variations in the consumer price index (CPI), was 1.6% in September 2024, decreasing slightly from the 2.0% rate in August 2024, before returning to 2.0% in October.
Despite the decrease in the inflation rate, Canadians continue to experience pricing pressures in most sectors. The real estate market's affordability has largely remained unchanged, with housing prices still relatively high.
The average Canadian borrowing from federally regulated financial institutions will face a stress test from these lenders. Mortgage lenders apply a higher rate of 5.25%, or the mortgage approval rate plus 2%, to assess whether homebuyers can afford the mortgage. Canadians dealt with 5% to 7% mortgage rates between 2022 and 2023. Due to policy rate reductions in 2024, the average five-year fixed mortgage rate has decreased to a range of 4% to 6%.
The five-year government bond yield often serves as a benchmark to track five-year fixed mortgage rates. With similar loan durations, the five-year government bond yield offers insights into the returns from a comparatively risk-free loan. Financial institutions add a premium to the government bond yield to establish fixed mortgage rates, which are riskier than government bonds.
Whilst variable mortgage rates typically follow prime rates, which are directly influenced by policy rates, they are expected to rise or decrease correspondingly.
There have been speculations about the influence of the recent U.S. presidential elections on the Canadian mortgage industry. The election outcomes, leading to optimistic consumer sentiments, prompted spikes in the stock and bond markets. A prolonged increase in bond yields may also lead to an increase in fixed mortgage rates. However, mortgage rates are influenced by factors such as inflation, market competition, additional government policies, and policy rate adjustments. It is likely that pressure on the bond market will start to lessen when the new president takes office in the White House.
Mortgage rates can vary across Canada by financial institution. Consumers acquiring new mortgages or looking to renew their mortgages are anticipated to explore various options to obtain the most beneficial rates. Analysts predict that $315 billion in mortgages will renew in 2025, and $400 billion in mortgages will renew in 2026. The impact of these renewals on the overall Canadian real estate market remains to be measured.
Key Changes in the Canadian Mortgage Industry
The Canadian government has introduced new measures to alleviate housing pressures and aid more Canadians in purchasing homes. From August 1, 2024, first-time homebuyers purchasing new constructions can avail of a 30-year insured mortgage amortization.
From December 15, 2024, the eligibility for 30-year mortgage amortizations expands to all first-time homebuyers and buyers of new constructions. This move aims to lower monthly mortgage payments and address the issue of affordability. Although this provides temporary relief, an extended amortization period generally results in higher interest expenses over the mortgage's lifespan.
The mortgage amortization period determines the duration required to pay off a mortgage. Generally, a mortgage's current term's interest and the down payment a buyer makes determine the amortization period.
A buyer who pays a down payment of less than 20% of the home's price will have a maximum amortization period of 30 years if they are first-time buyers purchasing a new construction. In all other cases, the maximum amortization will be 25 years.
Mortgage lenders will establish the maximum amortization period for buyers who pay a down payment exceeding 20%.
Additionally, effective from December 15, 2024, the price cap for insured mortgages will increase from $1 million to $1.5 million for homebuyers with a down payment less than 20%. This change expands options for Canadians to afford homes without requiring a substantial house down payment.
Beginning January 15, 2025, homeowners with homes valued up to $2 million can refinance their insured mortgages to up to 90% of their home's value to access the equity in their homes and fund the construction of a secondary suite, such as basements, in-law suites, and laneway homes.
Another significant change in the mortgage industry is that homeowners with insured mortgage holdings do not need to undergo the mortgage stress test process again when they renew their mortgages with a new mortgage lender. The mortgage stress test helps financial institutions determine whether homebuyers can afford their monthly mortgage payments should interest rates increase by 2%.
To put it straightforwardly, the Canadian government has been implementing adjustments in policies predominantly to make home purchasing more affordable for its citizens and to boost the economy. Being part of the Canadian mortgage sector, I welcome these proposed policy modifications. The end result is still uncertain, but I'm optimistic that these changes in combination with the rate decreases will motivate homebuyers who have been holding off to venture into the housing market and start looking for properties to purchase or refinance their current mortgages. I've got a few clients personally who have opted to rejoin the market, but we'll see if that trend continues as we move into the new year.
Please note: The details herein should not be considered as investment, fiscal, or financial guidance. It's essential to consult a certified expert for advice tailored to your specific situation.
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Reza Ghazi, as the CEO of GreenFlow Financial Corp, might discuss the impact of the Bank of Canada's interest rate reductions on mortgage industry trends during his presentation at the site's Finance Council.
In the context of the Canadian mortgage industry's changes, Reza Ghazi may provide insights on how these policies impact GreenFlow Financial Corp's business strategies and clientele at the site's Finance Council event.