The Bank of Canada today announced that it is lowering its target for the overnight rate by 0.50%, to 1.25%. The last time the Bank of Canada dropped the overnight rate by that much was 11 years ago, during the financial crisis of 2008 and 2009.
James Laird, Co-founder of Ratehub.ca and President of CanWise Financial mortgage brokerage, says this is one of the most significant Bank of Canada announcements in recent history.
“In a strong move, the Bank of Canada announced they are cutting the key overnight rate by 50 basis points to 1 ¼ percent. This is the first time the Bank has lowered the rate since 2015 and not since the financial crisis has the bank dropped by 50 basis points in a single move. The evolving spread of the coronavirus has the Bank concerned about business investment, consumer confidence, and overall economic growth. Also, inflation in January was higher than expected.”
James Laird says the prospect of future rate drops isn’t out of the question.
“The Bank says they are ready to adjust monetary policy further…This suggests additional rate cuts may follow this year.
“Consumers who currently have a variable rate will see their mortgage payments drop once Canadian mortgage lenders adjust their prime rates, likely this week. The expectation is that prime rates will drop by the full 50 basis points, although there have been times when lenders have not passed along the full savings to their customers.
“The Bank’s stance will cause bond yields to continue to decrease which means Canadians shopping for a fixed-rate mortgage can expect rates to fall and will likely approach the record lows of 2016. Anyone shopping for a home should check rates frequently as they will continue to decrease through the spring. The home buying process will become even more difficult as the low rates will increase buying power and bring more demand into the already hot market.”
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Changes to Mortgage Payments
According to Ratehub.ca’s mortgage payment calculator, a homeowner who put a 10% down payment on a $500,000* home with a 5-year variable rate of 2.60%, amortized over 25 years has a monthly mortgage payment of $2,102.
Assuming the banks pass on today’s 0.50% rate decrease, their mortgage rate will decrease to 2.10%, and their monthly payment will decrease to $1,987.
This means the homeowner will save $115 per month or $1,380 per year on their mortgage payments, compared to what they were paying before.
*January 2020 average home price in Canada was $504,358 according to CREA