Interest rate: experts call for caution regarding variable rate loans

Although the interest rate cut announced this week could result in savings for those looking to buy a home or renew their mortgage, the savings could be short-lived due to the impact that a boom in the real estate sector could have on inflation.

The Bank of Canada announced on Wednesday a reduction in its key rate from 5% to 4.75%, a first reduction in four years.

Over the past two years, the central bank has made ten increases in its key rate, which reached 5% in July 2023, a measure intended to counter inflation which had climbed to 8.1% in June 2022.

Economist Pierre-Marcel Desjardins judges that the reduction in interest rates announced this week shows that our battle against inflation is being won.

This is not to say that we will return to pre-pandemic prices, but the significant increases that we have experienced are being limited, and that is the real good news.analyzes the man who is also a professor at the School of Advanced Public Studies at the University of Moncton.

An economist from the National Bank, Daren Kingadds for his part that everything indicates that the Bank of Canada will make further reductions in its key rate over the coming months.

The Bank of Canada said very clearly on Wednesday that if inflation continues to move in the right direction, it is entirely possible that there will be further declines this year, possibly as early as July with a second drophe explained.

According to the financial institution’s projections, interest rates will be reduced three more times in 2024.

%”,”text”:”With that, we would have five reductions next year so that in 2025 we arrive with a key rate of 3%”}}”>With that, we would have five reductions next year so that in 2025 we arrive with a key rate of 3%.adds the economist.

A signal to the real estate sector

Marc Lalonde, wealth management advisor at Benchmarkpredicts that the first decrease announced this week will be felt in the real estate sector.

What we will see is that the real estate market, the one which has been hit the hardest [par les hauts taux d’intérêt]will start to openpredicts Mr. Lalonde.

As many Canadians were waiting for this signal from the central bank, Pierre-Marcel Desjardins also believes that many buyers will start looking for a house. Variable mortgage interest rates could prove advantageous, he suggests.

Someone who buys a house with an adjustable rate will benefit from the interest rate if it happens in July or September. This is truly the trend that is being reversed. So for people who have to borrow, I think it’s great newshe said.

By opting for a variable rate, we nevertheless expose ourselves to the risk that inflation not progressing in the right directionaccording to Daren King.

For example, if the real estate market takes off because interest rates begin to fall, the Bank of Canada could decide not to reduce its key rate further.

If inflation remains high and the rate reduction is lower than expected, we must be able to continue making these payments.

This explains why the Bank of Canada remains cautious in its approach, adds Mr. king.

We think that there will be a rebound in the real estate market in the next few months, however it must be said that at the moment, the key rate remains in restrictive territory. In other words, on Wednesday, the Bank of Canada did not step on the accelerator, it simply took its foot off the brake pedal a little, so we continue to slow down the economyhe illustrates.

Diversify your mortgage

To protect themselves, mortgage holders can look to a product that includes both fixed and variable rates, adds Daren King.

You can take a portion of your mortgage that is at a fixed rate and another at a variable rate. This way, you diversify your risk, in the same way that you diversify your stock portfolio.

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Moreover, it is important to do your research when shopping for a mortgage loan since not all variable rates are equal, he adds.

There are lenders who have variable rates, but fixed payments. This means that even if the key rate decreases tomorrow morning, you will continue to pay the same amount as when your loan was issued, except that you will pay a larger portion of capital.

With information from The morning and Janic Godin