Three Rate Cuts in a Row: What It Means for Toronto Housing

The Bank of Canada just cut its key interest rate for the third time in a row, bringing it down to 4.25%. Since June, we have watched this rate fall step by step: from 4.75% in June, to 4.5% in July, and now 4.25%. It looks like a trend, not a one-off. I am Moe Asgarian, Principal Real Estate Broker in Toronto and ranked #47 worldwide at RE/MAX.

Let me explain what is happening to mortgages and what to expect from the Toronto housing market over the coming months.

Three cuts in a row: where rates stand

Start with a simple picture. If we get two more cuts and the rate drops at least 0.25% each time, most people on variable-rate mortgages would see their rate land around 5%. That is still high compared to what we were used to, but it is well below what a family was borrowing at just last year. For first-time buyers, and for anyone with a mortgage coming up for renewal, that is a real reason for optimism.

What it means for variable and fixed mortgages

There is another piece here. Bond yields have fallen to their lowest level since the Silicon Valley Bank crisis of 2023, and those yields drive fixed mortgage rates directly. So fixed rates are drifting lower day by day. That means both kinds of loans, fixed and variable, are heading down together. When rates fall, people naturally assume buyers rush back in, because they feel safe that rates will not climb again.

The August market: quiet but shifting

Now the numbers. The latest Toronto real estate data, for August 2024, shows prices roughly flat year over year. Month to month, condo and apartment prices slipped, while houses stayed about level, partly because there are fewer of those homes for sale. If we get two more cuts and finish the year near 3.75%, that is a very good outcome, both for people renewing a mortgage and for those holding investment properties. Plenty of owners are paying $1,500 to $3,000 a month out of pocket to hold an investment unit while its value is not climbing. Imagine how much lower rates help them.

The gap between buyers and sellers

Here is the twist. As sellers watch rates fall, many no longer feel they must sell for less than the unit down the hall. They are hoping lower rates let them hold out for the same price, or a bit more. Buyers, meanwhile, see rates dropping and think they should wait to see how low they go, and price that expected saving into their offers. That creates a gap between what sellers want and what buyers offer. Homes are getting offers, sellers are turning them down, transactions fall, and inventory builds. Counterintuitively, each cut can push some Toronto investors to pull their units off the market rather than sell, which shrinks supply for a while.

Fixed or variable: how to think about your renewal

So what should you do at renewal, fixed or variable? Mortgages are not my job, but based on what I have studied, one of the better plays right now may be a 2 or 3 year fixed at a strong discount, then switching to variable once rates fall further. A 3 year fixed usually means a lower monthly payment than a variable today. But if you plan to sell your place in the next year or two, I would steer clear of fixed, because you could face a heavy penalty when rates keep falling. Know your life plan, set a goal for the next two or three years, and decide from there.

By late 2025, many experts expect the overnight rate near 2.75%, with variable rates possibly around 4% or lower. A lot can change before then, but if Canada's economy holds this course, that is a reasonable path. If you want help thinking through your own purchase, sale, or renewal, fill out the form at the bottom of this page or book a free consultation. Stay well and take care.