For the first time ever, the Bank of Canada dropped their overnight interest rate to .75%. Finance experts who believed rates were as low as they could go were blindsided. Most people in the industry had actually been anticipating an increase, so it’s no wonder that the news caught everyone off guard.
All mortgage lending rates are tied directly to the Central Bank. Variable rates, in particular, float up and down as the benchmark rate fluctuates. Home owners who are currently locked into a variable rate mortgage are in for a pleasant surprise this month. Depending on the size of the loan, this small change could result in a significant payment decrease.
Fixed rates are a different story. None of Canada’s major banks have matched the .25% rate drop, and they certainly aren’t obligated to do so. The Bank of Montreal and the Royal Bank responded to the rate drop with a small decrease of just 15 basis points. As consumers, the cheaper the money is, the more we are inclined and qualified to borrow. We are already faced with rapidly rising housing costs here in the GTA, and one could argue that a dramatic decrease in mortgage rates wouldn’t necessarily be beneficial to our real estate market or our borrowers in the long run.
The Bank of Canada’s Governor Stephen Poloz has explained that the change in lending rates is a response to the oil slump in Western Canada. Prior to the drop in oil prices, Canadian analysts were anticipating a rebalance in our economy in the export and business investment sectors, and relying on consumer spending and a strong housing market to sustain the growth.
So what will happen next? There have been rumours that Poloz could take an even more aggressive approach depending how our economy responds from coast to coast. Regardless of whether we see an upward or downward movement, there is no time like the present to take advantage of these exceptional interest rates to reduce your cost of borrowing.