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What does today's Bank of Canada rate cut mean for borrowers?
Today's decision by the Bank of Canada to lower its key lending rate by a quarter point to 4.75% is welcome news for many borrowers.
While the impacts of just one rate cut won’t be significant for most, it does mark the start of the central bank’s easing cycle, with additional rate cuts expected later this year and into next year.
During today's post-announcement press conference, Bank of Canada Governor Tiff Macklem emphasized that future rate cuts will depend on inflation trends.
"If inflation continues to ease and our confidence in reaching the 2% target grows, further rate cuts are likely," he said.
Here's a look at how different types of mortgage borrowers are impacted by Bank of Canada interest rate cuts.
Immediate impact on variable-rate mortgage holders
The most immediate effects of today’s rate cut will be felt by variable-rate mortgage holders, as their rates are influenced by Bank of Canada rate changes by way of their lender’s prime rate, upon which variable-rate products are priced.
In the next day or so, Canada's Big 6 banks and other financial institutions are
expected to lower their prime rates to 6.95, with the notable exception of TD Bank, whose mortgage prime rate is priced slightly higher.
Variable-rate mortgage holders will be impacted differently based on whether they have adjustable-rate or fixed-payment mortgages.
- Adjustable-rate mortgages:Those with adjustable-rate mortgages, whose payments fluctuate based on interest rate changes, will see immediate financial relief. Typically, a 25-basis point decrease translates to about $15 less per month for every $100,000 of mortgage debt, assuming a 25-year amortization period.
- Fixed-payment variable-rate mortgages: Those with fixed-payment variable-rate mortgages, which make up roughly 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 since the overall interest cost is decreasing.
No change for fixed-rate mortgage holders
Fixed-rate mortgage holders won't be impacted by the Bank of Canada's rate cut, as their interest rates are locked in for the term of their mortgage.
These rates are determined by Canadian bond yields, not by the Bank of Canada's prime rate changes.
Broader implications for borrowers
Beyond the effects on mortgage holders, the rate cut will also influence 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 across the board.
For prospective homebuyers, lower interest rates may improve affordability slightly, enabling them to qualify for larger mortgages or reduce their monthly payments if they were looking at purchasing a property with a variable or adjustable-rate mortgage.
However, it's also important to consider the broader housing market dynamics, including the impact lower rates can have on increasing property prices and competition in the real estate market, which can negatively impact affordability for Canadians. We expect the Bank of Canada to consider all factors as they look ahead for future rate decisions.
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