Interest Rates Set to Decline Soon

As winter and the holidays slowly approach, I believe that both potential buyers of real estate, as well as existing mortgage holders, were overjoyed when the Central Bank of Canada decided last October not to raise the primary interest rate. Now we just must hope that previous increases are a thing of the past and that we will soon see their decline as well.

Although we can rarely be sure what the spring market will bring us in terms of real estate, most economists agree that interest rates will start to fall. The only question is "when."

On the one hand, the Central Bank of Canada has not yet achieved its inflation target of 2%, although a series of primary rate increases have been very effective in achieving this target: inflation is declining; Real estate spending is also declining; unemployment, GDP are all also on the decline. Most economists, including Benjamin Thall, best known for all real estate-related matters, all predict that the primary interest rate will remain the same (potentially another minimal increase in December) to only start falling in mid-2024.

On the other hand, fixed interest rates, which are directly influenced by the market, have already fallen partially. Let's not forget, that fixed interest rates are directly influenced by the market (bond yields) while the movement of the primary interest rate is decided upon by a handful of people at the long table. In any case, the news, at least for now, is great for both existing customers as well as those looking for a new loan or a mortgage.

One thing everyone needs to be aware of is that when interest rates do start to fall, we will never go back to the age of 2% interest rates. Unfortunately, that’s a thing of the past. One thing is for sure, we will be telling our grandchildren about this phenomenon, just as some of us were told about the 18% interest rate. Although I don't wish to make any predictions, I believe that the new reality will be reflected in interest rates between 3-4%.

Real estate expectations will, as always, vary from region to region and from neighborhood to neighborhood. In general, the number of listed properties has increased, while sales have fallen. Prices have fallen; however, they are relatively stable in comparison to the previous year. The government institution CMHC expects that not much will change in the next year and that real estate will still fall by some 10%, before eventually recovering in 2027. Of course, this will be influenced by many factors such as geopolitical factors, immigration, demand, interest and other matters of this sort.

While we wait to see what will happen with inflation, interest rates and market activities, we need to address one of the most current issues that loan holders are currently facing, which is the decline in cash flow. The increase in interest rates has relentlessly influenced the increase in mortgage installments, especially for people with variable loans, and for those individuals whose loans were due for renewal during the period of high fixed interest rates.

If the increase in mortgage installments becomes unbearable, the only way to solve this is by extending the amortization period of the loan. This will automatically reduce the installment amount. You need to contact your bank or mortgage broker and initiate a conversation. In some cases, this change won't cost anything, especially if you've been making solid payments toward your principal over the years. The bank should be able to extend the amortization period to the one you were originally supposed to be locked into.

If you have not made extra payments, there is a possibility that you will have to apply for an extension of the amortization period and pay attorney's fees associated with the registration of a new loan. Whether or not you do this depends on the associated costs, and on how much the reduction in mortgage installments means to you. In any case, it is worth at least starting a conversation on this issue.

And don't forget – the amortization period is only a set period. If you extend it to, say, 30 years, that doesn't mean you can't shorten it by a year or two once interest rates drop. All you must do is increase your installment, which will automatically shorten your amortization. Most banks offer options through which you can pay off a loan in less than 5 years, even if you originally chose a mortgage of 30 years.

And while we wait for interest rates to drop, keep your head above water and enjoy the holidays!