The Bank of Canada (BoC) recently reduced its borrowing rate by 25 basis points, following previous cuts in June and July. As a result, Canada’s overnight lending rate fell to 4.25%. The overnight rate serves as the foundation for lenders’ prime rates and, consequently, variable mortgage rates. This is the lowest rate the BoC has set since January 2023.
What exactly does the rate cut mean?
Canadians will immediately benefit from lower interest rates as a result of today’s rate reduction.
The majority of Canadian lenders will now decrease their prime rates from 6.7% to 6.45% as a result of today’s rate reduction. Because the price of variable-rate mortgages and other borrowing products is determined by prime plus or minus a percentage, this will consequently result in a decrease in those products as well. Interest rates on home equity lines of credit (HELOCs) will likewise drop.
The effect on mortgages with variable rates
Depending on the type of variable mortgage a borrower has, variable interest rates will drop to reflect the reduction. Mortgage holders with adjustable-rate or variable mortgages will notice an instant reduction in their monthly payment, while those with fixed-rate mortgages will have a larger portion of their payment applied to the principal amount of their loan.
If you’re looking for a new rate or have a renewal coming up, the variable option can make a lot of sense if you have the appropriate risk tolerance given how much lower markets estimate variable rates to go.
The effect on mortgages with fixed rates
Although the BoC’s rate changes don’t directly require fixed mortgage rates, they do have an impact on them due to fluctuations in the bond market. This has pushed fixed mortgage rates lower, as lenders utilize yields as part of their investment mix and as a pricing floor.
Following today’s rate cut, the yield on the Government of Canada’s five-year bond has fallen to around 2.8%, and additional fixed-rate discounts are almost certainly on the way. That’s excellent news for anyone trying to lock in.
How does this affect the housing market?
The Canadian home market has mostly resisted the previous two rate decreases this year, but perhaps this one will change that. With borrowing costs down by 0.75% overall, mortgage affordability should improve, and incentive buyers may sit on the sidelines.
But the reality is that mortgage rates are still double what they were two years ago, let alone where they were during the pandemic with a record low of 0.25%.
So, this is how the latest rate cut is going to impact variable and fixed mortgage holders. If you are still confused or want to know how the rate cut is going to affect your mortgage payments, feel free to talk to our Abbotsford mortgage broker at Sandhu & Sran Mortgages. For more details, give us a call today.