The Bank of Canada slashed its overnight lending rate target to 1.25 per cent, as a response to the COVID-19 virus and its negative impact on the global economy.
“While Canada’s economy has been showing signs of stabilizing, COVID-19 is posing a health threat to people in a growing number of countries,” the Bank of Canada said in a statement. “In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted. This has pulled down commodity prices and the Canadian dollar has depreciated.”
Since the announcement this morning, there has been a lot of buzz surrounding its impact on the real estate market.
With an already crazy sellers market, it’s not an ideal situation. There are a ton of buyers and not a lot of inventory. A drop in interest rates makes it easier for Canadians to borrow, and has the potential to result in even more intense bidding wars. Purchasing prices will increase during a time when homes are already selling way over market value.
In addition, the announcement comes just ahead of a change to the Stress Test qualifying rate. It’s scheduled for April 6, and will impact a homebuyer’s ability to qualify for a mortgage. While there are no changes as a result of the rate drop, there is a chance that homebuyers will try to buy before the time comes.
It’s currently a waiting game to see what the “Big Banks” do with their prime rate. Technically, they are not required to cut their rates in half simply because the Bank of Canada did.
In the meantime, for anyone that may be wondering if they should take advantage of the opportunity, there are pros and cons to consider. Yes, the lower interest rate will help secure a bigger mortgage. But who knows how long they will stay this way. Use discretion and be careful not to load up on debt.
Overall, it’s hard to predict what COVID-19 and the Bank of Canada’s recent announcement will do to the real estate market. Will Canadians pull away from the stock market and invest in real estate? Or will everything slow down?
Only time will tell…