The Cost of Waiting For Interest Rate Drops

October 6, 2024

When the Bank of Canada announces a rate cut, it tends to make headlines across the country, sparking curiosity and excitement. But what do these cuts really mean for homeowners, homebuyers, and anyone looking to get a mortgage? Let’s break it down so you can better understand how these decisions could impact your financial plans.


What is the Bank of Canada Rate?

The Bank of Canada (BoC) sets what’s called the “overnight rate.” This is the interest rate at which banks lend money to each other overnight. Although this doesn’t directly dictate the interest rates we, as consumers, get on mortgages, it heavily influences them.


How Does a Rate Cut Work?

When the BoC cuts the overnight rate, it becomes cheaper for banks to borrow money. In turn, banks may pass these savings along to consumers by lowering the rates on their financial products—most notably, variable-rate mortgages and lines of credit. Lower interest rates mean you pay less in interest on your mortgage, making homeownership more affordable, at least in theory.


How Rate Cuts Affect Variable-Rate Mortgages (or Adjustable-Rate Mortgages)

If you already have a 'variable-rate mortgage', a rate cut could mean immediate savings. Your interest rate may decrease, which lowers your monthly payments or allows you to pay off your mortgage faster. This is because variable-rate mortgages fluctuate with the prime rate, which banks adjust in response to changes in the BoC’s overnight rate. Just how much can you expect to save? A 0.25% rate drop is equal to about $13 per $100,000 in mortgage that you have. That’s it unfortunately. A mere $13 monthly savings.

For prospective buyers considering a variable-rate mortgage, a lower interest rate might make this option more appealing. However, keep in mind that variable rates are subject to change, and if rates go up in the future, your payments could increase.


What About Fixed-Rate Mortgages?

Fixed-rate mortgages are a bit different. These rates are influenced by the bond market rather than the BoC’s overnight rate. However, a rate cut can still have an indirect effect on fixed-rate mortgages. When the overnight rate is cut, the bond market can respond by lowering yields, which may lead to lower fixed mortgage rates in the long term. This isn’t always immediate, and fixed rates tend to move less dramatically than variable rates.

If you’re locking in a fixed-rate mortgage, a BoC rate cut may not give you instant savings, but you might see rates trend down in the weeks or months following the announcement.


Waiting for Rate Cuts to Save Money on Housing

Perceived lower borrowing costs tends to encourage more people to buy homes, which increases demand and can push prices higher, especially in competitive markets like Kitchener-Waterloo. This is great for Sellers, but not so much for Buyers.

Home prices continue to go up without the strain of increased buyer demand. The amount you can pay for a house today, can alter by thousands to tens of thousands of dollars each and every month. A heated market caused by increased buyer demand can drive home prices to increase weekly. Unless you are able to increase your downpayment, increased house costs means a larger mortgage and less affordability.


Should You Wait to Buy?

Regardless if you are planning on getting a variable-rate or fixed-rate mortgage, the cost of waiting for interest rate drops could potentially mean paying a lot more for a home. If all want-to-be homeowners have the same thought, then you even risk being bumped out of being able to afford the style of home you want, due to mass multiple bid scenarios driving prices higher.

Bottom line, make sure you are partnered up with professional and trustworthy mortgage and real estate agents, to get the full picture on how much you buying a home today versus tomorrow might cost you.

Canada Greener Homes Initiative

September 1, 2024

The Canada Greener Homes Loan is an excellent initiative designed to support homeowners in making energy-efficient upgrades to their properties. By offering up to $40,000 in interest-free loans, this program helps Canadians invest in home improvements that not only enhance comfort and livability but also contribute to long-term savings on energy bills. Upgrades like better insulation, high-efficiency windows, and modern heating systems can transform a home, making it more enjoyable to live in and extending its lifespan.

Additionally, these improvements can significantly boost a home's market value, making it a more attractive option for potential buyers. Energy-efficient features are increasingly sought after, and homes with such upgrades often command higher resale prices. With the Canada Greener Homes Loan, homeowners can undertake essential renovations now and benefit from a more valuable and efficient property when they decide to sell.

Learn more about the loan: Canada Greener Homes Loan

Check out eligible retrofits: Eligible retrofits and grant amounts

Mortgage Renewal Options

With Tim Bloomfield

August 8, 2024

When it comes time to renew your mortgage, you're faced with a crucial decision that can significantly impact your financial future. Whether you're looking to secure a better rate, access your home's equity, or simplify your payments, understanding your options is key. Here’s a breakdown of the three main choices you have when renewing your mortgage: signing with your current lender, transferring to a new lender, or refinancing with either your current or a new lender.


The Three Options for Mortgage Renewals

Sign with Your Current Lender

Sticking with your current lender can be the simplest and most straightforward option. Every lender has its own process and timeline, so it’s essential to pay attention to the renewal paperwork they send out, typically around four months before your renewal date. The biggest advantage of renewing with your current lender is that you avoid the need to requalify for your mortgage. This means less paperwork, fewer headaches, and a quicker renewal process.

Transfer to a New Lender

If you’re looking to save money, transferring your mortgage to a new lender could be the way to go. This option often allows you to combine your mortgage with a secured line of credit into one easy payment. Plus, new lenders tend to offer the best and lowest rates, and they typically cover the costs of legal fees and appraisals, making this an attractive option. However, it’s important to note that transferring to a new lender may not be the best choice if you have a high level of debt, as you’ll need to requalify for the mortgage. If your original mortgage was insured, you can requalify using the contract rate for the stress test, which might ease some concerns.

Refinance with Your Current or a New Lender

Refinancing is a smart move if you’re looking to consolidate debt or access your home’s equity. While refinancing typically comes with higher interest rates compared to renewals or transfers, it offers the flexibility you might need to achieve your financial goals. Like with transferring, you’ll need to requalify for the mortgage, but the benefits of consolidating your debt or unlocking your home’s equity might outweigh the higher rates.

Choosing the right option for your mortgage renewal is a decision that should be made carefully, considering your financial situation and long-term goals. Whether you choose to stay with your current lender, transfer to a new one, or refinance, understanding the pros and cons of each option will help you make the best choice for your future.

If you have questions about what your best option might be, connect with Tim Bloomfield for expert advice:
tim.bloomfield@valkofinacial.ca 
(519) 497-0512

The Impact of Recent Capital Gains Tax Increase in Canada on Cottage and Second Home Owners

June 30, 2024

The Canadian government has recently implemented an increase in the capital gains tax, a move that has sparked significant concern among property owners, particularly those with cottages, investment properties, or second homes. While this tax change is aimed at generating additional revenue, it also has substantial implications for regular Canadians who may not see themselves as traditional investors.

UNDERSTANDING CAPITAL GAINS TAX

Capital gains tax is a levy on the profit realized from the sale of a non-primary residence, such as a cottage, second home, or investment property. The gain is calculated as the difference between the purchase price and the sale price of the property, with adjustments for certain expenses.


THE RECENT TAX INCREASE

The recent change involves increasing the inclusion rate for capital gains tax. Previously, a straight 50% of the capital gain was taxable. As of June 25, 2024, however, you will be taxed on 50% of your annual capital gains up to $250,000. For any capital gains over $250,000, that ratio increases to two-thirds, or approximately 66.67%. This means that more of the profit from the sale of these properties will be taxed, resulting in a higher tax burden for property owners.


IMPACT ON REGULAR CANADIANS

Cottage Owners

Generational Impact: Many Canadians own cottages that have been in their families for generations. The increased tax burden can make it more challenging to keep these properties within the family. Selling the cottage to cover the tax bill might become a necessity, disrupting family traditions and heritage.
Increased Costs: For those looking to sell their cottage, the increased tax means a significant portion of the proceeds will go to taxes, reducing the funds available for other uses, such as retirement savings or funding children’s education.

Second Home Owners

Retirement Planning: Many Canadians purchase second homes as part of their retirement plan, expecting to sell them for a profit. The higher capital gains tax can eat into these profits, affecting the financial security of retirees.
Affordability: The increased tax might deter potential buyers, leading to a slower market for second homes. This could result in lower sale prices, further reducing the expected return on investment. A good example of that is what is currently occurring in the condo apartment market.

Investment Property Owners

Reduced Profit Margins: Regular Canadians who have invested in rental properties for additional income will see a reduction in their profit margins due to the increased tax. This might lead some to reconsider the viability of maintaining these investments.
Market Dynamics: With the increased tax burden, there might be fewer properties on the market as owners hold onto their investments longer to avoid the tax hit. This could reduce the supply of rental properties, potentially driving up rents and affecting the rental market.


SHOULD YOU SELL?

The decision to sell in light of the increased capital gains tax depends on individual circumstances. Here are a few considerations:

Financial Goals: Assess your financial goals and the role your property plays in achieving them. If the property is essential for your retirement plan or income, holding onto it might still make sense.
Tax Planning: Consult with a tax advisor to explore strategies for minimizing the tax impact. This could include timing the sale to coincide with lower income years or exploring exemptions and deductions that might apply.
Market Conditions: Consider the current real estate market conditions. If property values are high, selling now might still yield a significant profit even after taxes. Conversely, if the market is slow, it might be worth holding onto the property until conditions improve.


CONCLUSION

The recent increase in capital gains tax in Canada presents a new challenge for regular Canadians who own cottages, second homes, or investment properties. While the tax hike is aimed at generating revenue, it has the potential to impact family traditions, retirement plans, and the overall financial well-being of many. Careful consideration of personal financial goals, market conditions, and strategic tax planning can help mitigate some of the effects of this increased tax burden. Consulting with financial and tax advisors is crucial to making informed decisions about whether to sell or hold onto these properties in the current economic climate.
 

Bank of Canada Cuts Key Interest Rate to 4.25%

June 9, 2024

The BOC cut the key interest rate for the first time since the pandemic, and is even suggesting there may be more cuts coming. What does this mean for you? Depending if you are on the buying side or selling side of a house sale, this is how you may be impacted: 


FOR BUYERS

Lower Mortgage Rates

Affordability: With the cut in the key interest rate, mortgage rates offered by banks and other lending institutions are likely to decrease. This means lower monthly payments for homebuyers, making real estate more affordable.
Qualification: Lower rates improve buyers' debt-to-income ratios, potentially allowing more individuals to qualify for mortgages and enabling buyers to afford more expensive homes than they could previously.

Increased Purchasing Power

Bigger Budgets: Buyers can leverage the lower rates to stretch their budgets further. This might allow them to consider properties that were previously out of reach.
Investment Opportunities: Lower borrowing costs can make real estate investments more attractive, encouraging more people to buy properties for rental income or capital appreciation.

Market Competition

More Buyers: The lower rates are likely to attract more buyers into the market, increasing competition for homes. This can be particularly intense in markets where housing supply is already tight.


FOR SELLERS

Higher Demand

Increased Buyer Interest: As more buyers enter the market due to more affordable mortgage rates, sellers may see heightened interest in their properties, potentially leading to quicker sales.
Competitive Offers: Higher demand can result in multiple offers on properties, often leading to bidding wars, which can drive up the final sale price.

Potential for Price Appreciation

Rising Home Prices: The increase in demand typically puts upward pressure on home prices. Sellers might be able to command higher prices for their properties, benefiting from the competitive market environment.

Faster Transactions

Quicker Sales: With more buyers eager to capitalize on lower rates, homes may spend less time on the market. This can be advantageous for sellers looking for swift transactions.


GENERAL IMPACT ON THE REAL ESTATE MARKET

Economic Stimulus

The rate cut is intended to stimulate economic activity, and the real estate sector is a significant part of the economy. Increased activity in real estate can have a positive ripple effect, boosting related industries such as construction, home improvement, and real estate services.

Inventory Challenges

Supply Constraints: If the supply of homes doesn’t keep up with the increased demand, it can lead to inventory shortages. This might make it harder for buyers to find suitable homes and could contribute to further price increases.

Inflation Considerations

While the rate cut aims to boost the market, it may also lead to higher inflation. This could impact the real estate market by increasing the costs of building materials and labor, potentially affecting new construction and renovation projects.


SUMMARY

The Bank of Canada’s interest rate cut to 4.25% is poised to significantly influence the real estate market. Buyers will benefit from lower mortgage rates and increased affordability, which could allow them to purchase more expensive homes or enter the market for the first time. Sellers, in turn, are likely to see increased demand, potentially higher sale prices, and quicker transactions. However, these changes may also bring challenges such as increased market competition and potential inventory shortages, along with broader economic impacts like inflation.