The key interest rate cut: the impact on your mortgage

All owners with variable-rate mortgages (VRMs), adjustable-rate mortgages (ARMs) and home-equity lines of credit will have a lower interest rate component applied to their regular payments as soon as their lender updates its prime rate. Payment relief can therefore be expected for all adjustable-rate products (ARMs) and home equity lines of credit. That being said, for variable-rate mortgages with fixed payments, the payment won’t change; instead, the impact will be seen in the amortization of the mortgage.

Fixed-rate mortgages, which are affected primarily by the yield on Canada bonds, will see no changes.

More in-depth answers have been posted on our website since the Bank of Canada’s announcement

Generally speaking, if fixed rates go down, most lenders, including nesto, allow a downward adjustment to your interest rate before the instructions are sent to the notary. Some products or promotions may limit this decrease to a single revision, so you have to be strategic.

For VRMs and ARMs, the reduction applies automatically when the lender’s prime rate goes down after the Bank of Canada's key rate changes. The discount, which represents the secured and fixed portion of your mortgage offer, is deducted from the prime rate and the result is the effective rate. 

Early renewal is possible at any time before the renewal date. Logically, for early renewal to be worthwhile, it has to be profitable in terms of the new interest rate versus the applicable penalties.

You can reserve an interest rate up to 120 days before the maturity date. Some promotional products offer a shorter guarantee of 60 to 90 days with better rates. But pay careful attention to the conditions, which can sometimes be more restrictive (such as no prepayment or higher penalties). Don’t forget that nesto offers a guaranteed product for up to 150 days without additional restrictions.
Knowing this, current creditors will often try to retain their customers by offering to renew six to eight months before the official renewal date. Why? Because at that point there’s no competition. Unfortunately, such offers are often not very competitive; borrowers think they’ve got a good deal but actually end up paying a little more. It’s better to wait until you’re in the key period of 120 to 150 days to compare all the options on the market.

If borrowers renew their loan before the renewal period ends, they may have to pay a prepayment penalty, unless they switch from a floating rate (variable or adjustable) to a fixed rate for the remaining term of the loan.

Even so, it may be advantageous to break your mortgage and pay a penalty (penalty calculator). Whether you’re looking for a lower rate, more advantageous terms or debt consolidation, you have to do your homework and calculate the advantages of early renewal. Facilitating a project via refinancing during the term can also be an attractive option despite the penalty, which can also be paid via a weighting of the rate instead of your having to disburse a large sum to pay the penalty.

Open mortgages don’t have a prepayment penalty. But open-rate mortgages often come with much higher rates, so they are quite rare and tend to be used in the very short term for a specific reason.

Any changes must be made as quickly as possible because once a loan has been approved unconditionally by the mortgage creditor, a strict process is set in motion so that the transaction can be concluded at the notary's office. Any changes require a review of the file and possibly an update of certain documents. Once the file is at the notary’s office, it will be very difficult to make any changes. It’s critical to communicate with the mortgage broker or creditor to minimize last-minute changes.

The benchmark rate for the mortgage stress test hasn’t changed: it’s still 5.25%. Remember the qualification rules: all mortgage transactions must pass the mortgage stress test, whether they involve a fixed rate, a variable rate or a home equity line of credit. The rules state that the borrower must qualify for the higher of the benchmark rate or the contract rate, plus 2%. So, with rates hovering around 6% in recent months, the stress test was 8%. With the drop in rates, which has been small so far, future buyers will benefit from a reduction in the qualification level. The industry is putting a lot of pressure on the government to reduce the benchmark rate and even to loosen the rules of the stress test as a whole, but to no avail so far.

It’s important to note that the federal government provided new assistance for first-time buyers in its latest budget and in its fall economic statement. Starting August 1, 2024, first-time purchasers of a new home can amortize their insured mortgages over 30 years, as opposed to the current 25 years. This measure could make it easier for young Canadians to become homeowners. To be continued…

I think it’s still too early to see a significant change in the market. In one of our articles, we discussed the strategies used by first-time buyers. Our article is based on data from CMHC’s recently released 2024 Mortgage Consumer Survey. Buyers aren’t taking full advantage of the tax-free accounts that can help them accumulate a down payment. Only 31% of first-time home buyers used Registered Retirement Savings Plan (RRSP) funds through the Home Buyers’ Plan (HBP). Of those surveyed, 71% said they were aware of the Tax-Free First Home Savings Account (FHSA) but only 33% had used it.

What is aptly referred to as the Great Renewal is the significant segment of mortgages that were taken out before or at the start of the pandemic (2019 and 2020). These mortgages are maturing and are expected to cause a 25% to 40% payment shock as a result of rising rates.

Borrowers are likely to be disadvantaged because most mortgages (70%) are held by the industry’s largest and most prominent players. These mortgages are recorded as collateral and are more expensive to renew because they cannot be transferred between lenders without being discharged first. Fortunately, lenders that specialize exclusively in mortgages, such as nesto, offer more advantageous solutions that make mortgage transfers more manageable.

In addition to the type of mortgage, which depends on your lender, it’s also important to note that borrowers who are not insured against default by one of the three mortgage insurance providers (CMHC, Sagen or Canada Garanty) must requalify (stress test) for their next mortgage transaction, which could put them at a disadvantage, unlike borrowers who have such insurance and can qualify, only with the contractual rate  they are offered, simply on the condition that they maintain their insurance.

Finally, we shouldn’t expect any favours et more competitive offers from the big banks when renewing mortgages. The competition is likely to play out at the mortgage-qualification level. Borrowers will have many more options if they qualify for a new loan compared to borrowers who don’t meet applicable qualification requirements and thus are handcuffed to their current creditors. 

As a pioneer in online mortgage lending in Canada, nesto has a mission to provide a positive, transparent, simplified mortgage financing experience from start to finish. nesto‘s unbiased service provides you with the best possible mortgage deal and helps you save thousands of dollars on your mortgage.