The Bank of Canada’s overnight target rate remained unchanged for over a year prior to the current COVID-19 related emergency rate cuts. Most recently, the BoC cut its overnight rate by 50 basis points (bps), bringing Canada’s key lending rate to 0.25%.
Bank of Canada Target Interest Rate Changes
|Date||Target (%)||Change (%)|
|March 27, 2020||0.25||-0.5|
|March 16, 2020||0.75||-0.5|
|March 4, 2020||1.25||-0.5|
|January 22, 2020||1.75||—|
|December 4, 2019||1.75||—|
|October 30, 2019||1.75||—|
|September 4, 2019||1.75||—|
Source: Bank of Canada
These measures are “intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic,” the BoC said in its release.
The BoC further assures Canadians that its efforts will “lay the foundation for the economy’s return to normalcy.”
In the meantime, these drastic cuts may leave many homeowners and mortgage shoppers questioning the magnitude of the BoC’s decision and how it may impact them at home.
What Can Current Mortgage Holders Expect?
For homeowners with a variable-rate mortgage, the current cuts will lower your borrowing costs. Those with a fixed-payment variable mortgage will see the interest portion of their monthly payment decline, meaning more money will go toward the principal.
“The Bank is playing an important complementary role in this effort. Its interest rate setting cushions the impact of the shocks by easing the cost of borrowing,” the BoC said.
However, it is up to individual lenders to determine how much savings will go to the borrower. All of Canada’s big banks have chosen to pass along the BoC’s full rate cuts to date by lowering their prime rates by an equal amount.
This decision has been positive for existing floating-rate borrowers who have seen their rates drop significantly.
How Will Rate Cuts Affect New Borrowers?
It hasn’t been so great for new homebuyers searching for a mortgage. Most lenders have been gradually raising both their fixed and variable rates due to greater uncertainty about credit risk and liquidity concerns in the market.
For variable-rate mortgage shoppers, lenders have been reducing their discounts from the prime rate and, in some circumstances, applying additional premiums to prime for new customers.
Whereas just a week ago, 5-year variable rates could be found for prime – 1.10%, today most are priced at prime (2.45%) or higher.
The COVID-19 crisis has left expansive economic impacts and is causing a growing loss of liquidity. The financial uncertainty could lead to immeasurable credit losses and has investors adjusting for the potential risk. Unfortunately for new borrowers, that means mortgage rates may remain higher than they otherwise would be until the pandemic subsides.