Long awaited Bank of Canada rate cut gives Canadian homeowners some relief

TORONTO/OTTAWA (Reuters) - Homeowners in Canada will breathe a sigh of relief after the central bank cut interest rates for the first time in four years and signalled more to come, easing some pressure on variable rate mortgage holders.

Canadian households, now considered to hold the biggest debt among G7 countries, took out variable-rate mortgages when rates were at historic lows during the COVID-19 pandemic but a series of hikes since 2022 put them under pressure, forcing many to pay only the interest portion while the principal amount piled up.

Meanwhile, fixed rate mortgage holders will likely see a payment shock when their mortgages renew in the coming months. Unlike in the U.S., Canadian mortgages renew once in three or five years with an amortization period typically around 20 to 25 years.

"For the economy, one 25 bp move... is not going to make a big impact all by itself. However, it will give at least a small bump to sentiment among borrowers, and brighten the mood in what has been a remarkably quiet housing market," BMO's economist Doug Porter said.

Ratehub.ca's calculations show that for a home worth C$703,446, the average price in Canada, a 5-year variable rate of 5.95% amortized over 25 years has a monthly mortgage payment of C$4,157. With the 25-basis point rate decrease, the homeowner will pay C$96 less per month or C$1,152 less per year on their mortgage payments.

Residential mortgage debt stood at C$2.16 trillion ($1.57 trillion) as of February, according to the Canada Mortgage and Housing Corporation. It had recently said that delinquency in home loans had started increasing from the fourth quarter of last year.

More than three quarters of those mortgages will be up for renewal in 2026, according to the banking regulator.

Canada's big banks, which are keeping a close eye on their mortgage loan books to limit risks, cut their prime rates to 6.95% following the announcement.

Royal LePage's CEO Phil Soper said a study by the Canadian realtor showed half of sidelined homebuyers planned to resume their search plans once the rate began to drop.

"This will no doubt spark activity and put upward pressure on home prices in the second half of the year," Soper said.

BoC Senior Deputy Governor Carolyn Rogers said housing is not what the central bank targets.

"It's clear there is some pent-up demand in the housing market so we'll see how it goes."

($1 = 1.3719 Canadian dollars)

(Reporting by Nivedita Balu and Promit Mukherjee in Toronto; Editing by Josie Kao)