The Bank of Canada’s decision to lower its key lending rate by a quarter point to 4.75% today is welcome news for many borrowers.
Although the impact of a single rate cut is limited, it signals the start of the central bank’s easing cycle, with more rate cuts anticipated later this year and into the next.
During the post-announcement press conference, Bank of Canada Governor Tiff Macklem highlighted that future rate cuts will hinge on inflation trends.
“If inflation continues to ease and our confidence in reaching the 2% target grows, further rate cuts are likely,” he stated.
Here’s how different types of mortgage borrowers will be affected by the Bank of Canada’s interest rate cuts.
Variable-Rate Mortgage Holders
Variable-rate mortgage holders will feel the most immediate effects of today’s rate cut, as their rates are directly influenced by the Bank of Canada’s rate changes through their lender’s prime rate, which determines the pricing of variable-rate products.
In the coming days, Canada’s Big 6 banks and other financial institutions are expected to lower their prime rates to 6.95%, with TD Bank being a notable exception as its mortgage prime rate is slightly higher.
Variable-rate mortgage holders will experience different impacts depending on whether they have adjustable-rate or fixed-payment mortgages.
Adjustable-Rate Mortgage Holders
Those with adjustable-rate mortgages, where payments fluctuate with interest rate changes, will see immediate financial relief. Typically, a 25-basis point decrease translates to approximately $15 less per month for every $100,000 of mortgage debt, assuming a 25-year amortization period.
Fixed-Payment Variable-Rate Mortgages
Holders of fixed-payment variable-rate mortgages, which represent about 15% of outstanding mortgages in Canada, will not see a change in their monthly payment amounts. However, a larger portion of each payment will now go towards reducing the principal, as the overall interest cost decreases.
Fixed-Rate Mortgage Holders
Fixed-rate mortgage holders will remain unaffected by the Bank of Canada’s rate cut, as their interest rates are locked in for the term of their mortgage. These rates are influenced by Canadian bond yields, not by changes in the Bank of Canada’s prime rate.
Beyond the effects on mortgage holders, the rate cut will also impact other types of borrowing. Interest rates on lines of credit, personal loans, and other variable-rate debt will decrease following changes to the prime rate, making borrowing slightly cheaper overall.
For prospective homebuyers, lower interest rates may enhance affordability slightly, allowing them to qualify for larger mortgages or reduce their monthly payments if considering a variable or adjustable-rate mortgage.
However, it’s important to consider the broader housing market dynamics. Lower rates can drive up property prices and competition in the real estate market, potentially affecting affordability for Canadians. The Bank of Canada is expected to consider these factors in future rate decisions.