Who Benefits from Interest Rate Cuts? Home Buyer Perspective

March 9, 2020 | Posted by: Ron Chan

Who Benefits from Interest Rate Cuts

Last week in our spring season home buyer projections we predicted that the Bank of Canada would drop the prime rate very soon. Two days later that happened. Given the connection to mortgage rates we’ve been discussing this topic frequently over the last couple of years. Today, we’re going to expand upon the concept with a practical look at who benefits the most for significant drops in BoC’s interest rate as it applies to the local real estate market. If you identify yourself in any of the below, you are in a good position to reap the rewards.

Top 3 Local Real Estate Beneficiaries of the Bank of Canada Cut in the Prime Interest Rate

Variable Rate Mortgage Holders

If you are currently sitting on a variable rate mortgage in Winnipeg you will directly benefit by paying less in interest costs. For owners of single detached homes that may equate anywhere from $100-200 month in savings, or over $1200-2400 per year. That extra money can be used to help pay down the mortgage or used for other investments, such as home improvements which may add market value to your home.

With the prime rate expected to remain low in light of the current economic concerns, new buyers can also find peace of mind in choosing a variable rate mortgage.

Home Equity Lines of Credit Holders

Holders of home equity loans also benefit, as these lines of credit are tied to the Bank of Canada rate. If you are thinking about getting a home equity loan in order to invest in renovations, expansions, and so forth you’re in a prime position to do so. 

New buyers will also enjoy this opportunity as they build up equity through mortgage payments. This increases options when it comes to available real estate listings. Let’s say you found the perfect home in every way but one - there is only one bathroom. You can go ahead and buy the home, make a few payments to build up equity, and take out a home equity loan while interest rates are low to renovate to add a second bathroom. It really is a perfect time to capitalize on a home equity line of credit.

New Buyers

The greatest benefit is realized in the new and first-time buyer category. If this is you, you will enjoy an easier mortgage stress test, especially in light of the Government of Canada’s new and relaxed rules for the stress test. Ratehub estimates that with the new lower prime rates, the rate required to qualify under the stress test will ease to 4.59 percent, from its current 5.19 percent mark. In addition, new buyers will enjoy lower variable rates which as mentioned are directly tied to the Bank of Canada rate. And, with the tied-in lower bond yield, fixed mortgage rates will also continue to plummet. Variable and fixed rates are both low - which opens up a world of opportunity for new and first-time buyers.

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