The US Federal Reserve Rate Cut Could Impact Canadian Mortgages Too; Here’s How

A for sale sign is displayed in front of a house in the Riverdale area of Toronto in a file photo. The Canadian Press/Evan Buhler

The recent interest rate cut by the U.S. central bank could also have an impact in lowering mortgage rates in Canada, experts say.

The U.S. Federal Reserve cut its key rate on Sept. 18 by 50 basis points to a range between 4.75 percent and 5 percent, marking the first U.S. rate cut in more than four years.

Emrul Hasan, an economics lecturer at the University of British Columbia, told The Epoch Times that rate cuts in the United States “always have a direct influence on the Canadian bond market.”

Government bond yields provide insight into where fixed mortgage rates are going, according to a blog post by the Calgary-based True North Mortgage.

If five-year bond yields go up steadily “over days,” it means banks will likely be raising their five-year fixed mortgage rates soon. And if those bond yields drop steadily over days, it means banks are “thinking of” lowering their rates, says True North Mortgage.

“As the U.S. drops rates, it allows the Canadian bank to drop rates, which then would lead to lower five-year government bond yields, which will lead to lower mortgage rates,” True North Mortgage founder and CEO Dan Eisner told The Epoch Times in an interview.

It may take some time before the impact of the U.S. Federal Reserve rate cut may be visible in Canada, however, says mortgage broker James Harrison.

“The impact to the bond yields did not instantly change after the U.S. drop,” he said. “I do think that this will be a very positive impact on Canadian real estate as we move into the fall and early 2025.”

Canadian Rate Cuts

The Bank of Canada cut its key rate from 4.5 percent to 4.25 percent on Sept. 4, noting that inflation fell to 2.5 percent in July, getting closer to the target of 2 percent. That was the third rate cut this year in response to lower inflation, and some two weeks later, inflation did reach the 2 percent target, as reported by Statistics Canada on Sept. 17.

The next interest rate announcement is scheduled for Oct. 23.

“We'll continue to see the cost of borrowing for variable-rate mortgages and lines of credit continue to come down,” which will have a positive psychological effect on buyers and sellers, Harrison said.

He also expects an increase in house purchases in the new year.

“I think there'll be even more in early 2025 after the new first-time homebuyer and insurable mortgage rule changes come into effect.”

Harrison says he has been seeing a “big uptick” in pre-approval applications, which could be an indication of the market becoming more active.

“That’s typically a sign that buyers are quite confident and looking to enter the market,” he said. “Where you typically see it is in January, at the start of the new year. But to see it in September is, I think, a direct impact of the rate drops we’ve seen and will continue to see.”

At the Bank of Canada’s interest rate announcement on Sept. 4, governor Tiff Macklem said further interest rate reductions are “reasonable to expect” if inflation continues to slow, but that the central bank will “take our monetary policy decisions one at a time.”