Yahoo Finance What this Bank of Canada rate cut today could mean for your mortgage
The Bank of Canada (BoC) cut interest rates again on Wednesday, after a cool inflation reading for June.
Yahoo Finance Canada spoke to three mortgage experts about what this could mean for mortgage rates, payments, and the housing market.
Banks likely to drop prime rate to 6.7 per cent
The BoC’s benchmark interest rate sits at 4.5 per cent following two 25-basis-point cuts. This is the rate at which banks can borrow money amongst themselves.
Barring a rare deviation, banks will reduce their own “prime” lending rates by the same percentage, from 6.95 to 6.7 per cent, easing the cost of borrowing for Canadians.
“They’ll all generally lower it on the same day,” Penelope Graham, a mortgage expert at Ratehub.ca, said in an interview with Yahoo Finance Canada.
In turn, any lending products tied to the prime rate – like variable mortgages and lines of credit – will also see their rates drop, says Victor Tran, a Toronto-based mortgage broker and Ratesdotca expert. Variable rates are generally calculated as prime plus or minus a percentage.
While most lenders offer the same prime rate across the board, TD Bank is one of the exceptions, Tran notes. TD has a regular prime rate, which is the same as the other banks, as well as a mortgage prime, which is 0.15 per cent higher.
“So, the TD mortgage prime will probably be 6.85 per cent effective on Wednesday,” Tran said in an interview with Yahoo Finance Canada. “For them to stay competitive, they simply offer a larger discount to kind of match everyone else.”
Immediate savings for adjustable-rate mortgage holders
Anyone with a variable mortgage will see a lower interest rate if the BoC makes a cut on Wednesday, Graham says, but not everyone will be impacted the same way.
If you have a variable-rate mortgage with fixed payments, your monthly payment won’t change. Rather, more of your payment will go towards the principal of the mortgage and less towards interest, resulting in long-term savings.
Those with adjustable-rate mortgages, on the other hand, will see their payments drop immediately. For every $100,000 borrowed, a rate cut of 0.25 per cent results in around $15 of monthly savings, Tran says.
Based on the average home price in Canada of $696,179, a homeowner would save $95 per month, according to Ratehub.ca calculations (assuming a 10 per cent down payment, 25-year amortization, and five-year variable rate dropping from 5.7 to 5.45 per cent).
Coupled with last month’s rate cut, the total savings would be close to $200 per month.
“So, right away, some borrowers are going to see more money in their pocket, and some are going to see a little bit of a boost in the equity they’re building up,” Graham said.
No guarantee fixed mortgage rates will drop
Anyone with a fixed-rate mortgage is locked into the same rate and payment for the duration of their term. However, Graham says those shopping for a new fixed mortgage, or nearing renewal, could potentially benefit from the BoC rate cut, albeit indirectly.
Unlike variable mortgage rates, fixed mortgage rates don’t move in lockstep with the central bank’s decisions and prime rate changes. Rather, lenders adjust their fixed mortgage rates based on what’s happening in the bond market.
“And bond investors react really favourably to Bank of Canada rate cuts,” Graham said.
However, Graham and Tran suggest that the bond market may have already priced in the rate cut. So, fixed rates might not drop further, though Graham notes the BoC’s tone regarding future cuts could also play a factor.
Additionally, since Canada’s five-year government bond yield generally follows the U.S. treasury 10-year yield, the U.S. economy has a “bigger impact” on fixed rates than BoC rate decisions, says Leah Zlatkin, a Toronto-based mortgage broker and LowestRates.ca expert.
Tran says fixed mortgage rates have been trending lower, but dropped only around 0.1 per cent since the first BoC cut on June 5. Generally, banks kept their posted rates the same and offered slightly larger discounts on a case-by-case basis, he adds.
“I suspect we’ll probably see something similar after Wednesday’s announcement,” Tran said.
What does this mean for the housing market?
Ultimately, Tran believes another 0.25 per cent rate cut is likely to have minimal impact on the housing market.
A “flood of listings” appeared following last month’s rate cut, Zlatkin adds, yet sales remain slow. She suspects a lot of buyers are waiting on the sidelines for further cuts, but cautions that home prices are likely to rise as rates fall.
“Everybody’s kind of waiting to see what happens next,” Zlatkin told Yahoo Finance Canada. “But there’s a possibility that there’s going to be a bit of a landslide come September, when all of a sudden rates start going down and people start jumping into the market.
“Then things are going to heat up.”
Farhan Devji is a freelance journalist and published author based in Vancouver. You can follow him on Twitter @farhandevji.
