The Bank of Canada (BoC) today announced a second, unscheduled emergency rate cut in response to the COVID-19 pandemic. The BoC is lowering its target for the overnight rate by 50 basis points, to 0.25% percent.
This is in addition to the Bank’s March 4th and March 14th rate cuts of 50 basis points each. The Bank has now cut the target for the overnight rate by 150 basis points in March. The Bank’s statement acknowledged the urgency of the situation in Canada in explaining its decision.
“The spread of COVID-19 is having serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices”, the statement read. “The pandemic-driven contraction has prompted decisive fiscal policy action in Canada to support individuals and businesses and to minimize any permanent damage to the structure of the economy.
“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.”
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What does another emergency rate cut mean?
James Laird, co-founder of Ratehub.ca and President of CanWise Financial, said the interest rate decisions in March have been significant, but that there is still some question about how lenders will choose to respond.
“The Bank continues to act forcefully to reduce the impact of the coronavirus on the economy,” he said.
“Even though the Bank of Canada had already cut the target for the overnight rate by 100 basis points earlier this month, lenders have been increasing their fixed rates. This is due to fear and uncertainty in the market, which is overpowering the stimulus effects that a rate cut normally drives. It will be interesting to see if this latest round of stimulus provides the desired stability in the mortgage market. We can observe the results by seeing how fixed rates trend in the coming days.
“The effect of this announcement on fixed rates will be determined by the risk premium lenders are factoring into mortgage rates due to economic uncertainty and growing unemployment. In these turbulent times, anyone shopping for a mortgage should check Ratehub.ca frequently to ensure they get the best rate available.”
Changes to Mortgage Payments (since March 1st)
According to Ratehub.ca’s mortgage payment calculator, a homeowner who put a 10% down payment on a $500,000* homewith a 5-year variable rate of 2.60% amortized over 25 years (a total mortgage amount of $463,950)had a monthly mortgage payment of $2,102 before March’s rate cuts.
With today’s additional 50-basis point rate cut, their mortgage rate has decreased to 1.10% and their monthly payment has decreased to $1,769.
This means that a homeowner with a variable rate will save $333 per month or $3,996 per year on their mortgage payments, compared to what they were paying on March 1st.
*February 2020 average home price in Canada was $539,724 according toCREA