The anticipated Bank of Canada meeting delivered what has been whispered about for the past few months: a rate cut! This is the first rate cut in about four years, and with it come many questions for homeowners and aspiring homeowners. Will there be more cuts? Is this the time to get into the market? Experts predict more rate cuts in the coming meetings, so hold on tight and let’s hope for the best.
Will My Payments Go Down?
This depends on the type of variable rate mortgage you have. Many do not realize that there are actually two types of variable rate mortgages. Both are identified as variable rate mortgages, but it is important to know the difference between them.
Adjustable Rate Mortgage (ARM)
With an adjustable rate mortgage, your payment changes when the prime rate changes. If the prime rate goes up, your monthly mortgage payment will go up. If the prime rate drops, your monthly mortgage payment goes down. With the recent rate drops, those who have an ARM will experience some relief with their monthly mortgage payments.
Variable Rate Mortgage (VRM)
If you have a variable rate mortgage, your monthly mortgage payment remains the same throughout the course of your mortgage term. If the interest rate drops, you pay less interest and more principal goes towards the balance. If the interest rate rises, more interest is paid and less principal goes towards the balance. Your payment does not change unless you hit the trigger point.
Trigger Point
The trigger point is when your mortgage payment only covers the interest. This can lead to negative amortization. The best thing to do at this point is to increase your payments so that you are also paying some principal.
Fixed Rates and Bond Yields
Please bear in mind that the Bank of Canada’s prime rate meeting does not affect the fixed rate. It is the bond yield that governs the fixed-rate, not the prime rate. If the 5-year bond yield goes up, you can expect the fixed rate to go up. If it goes down, the fixed rate will go down.
Understanding Your Mortgage
Speak with your mortgage broker or bank mortgage adviser if you are unclear about the type of mortgage you have. It is important to understand your mortgage product. If you have any questions, schedule an appointment and we would be happy to assist you. For those in specific locations, consider reaching out to a mortgage broker close to you.
Don’t hesitate to reach out for guidance on navigating the mortgage landscape. We’re here to help you find the best mortgage broker and services tailored to your needs.