It’s been nearly two weeks since Bank of Canada announced a reduction to its overnight lending rate. At the time, we could only conjecture about how this rate reduction might impact borrowers and mortgage rates, but now we’ve seen its actual impact. Here’s a look at what’s happened since the announcement:
Prime Lending Rate
Soon after Bank of Canada’s announcement, Canada’s five major banks–Royal Bank of Canada, Bank of Montreal, TD Canada Trust, CIBC and Scotiabank–cut their prime lending rate by 15 basis points to 2.85 effective last week.
Fixed-rate mortgages tend to react to changes in bond yields, and yields on five-year government bonds fell 17 basis points the day of BoC’s announcement. RBC cut its posted rate for five-year fixed mortgages by 10 basis points to 4.84 per cent (it also lowered rates for three, seven and 10-year terms), while Bank of Montreal lowered its five-year fixed rate to 4.79. The actual available rates mortgage rate amongst the big banks is between 2.79-2.89 for a five-year fixed mortgage. Meridian Credit Union, Ontario’s largest credit union, recently lowered its five-year fixed closed mortgage rate to 2.99 per cent. A Bank of Montreal report shows that 15 per cent of Canadians surveyed as considering homeownership as a result of the rate drop. Despite access to cheaper loans, experts are urging Canadians not to borrow more than they can afford.
While lower mortgage rates may sound like good news for consumers, the reduction cuts both ways, because it also means less interest for savers. Financial Post reports that soon after BoC’s announcement, several banks alerted customers that it would be paying less in interest. The Globe and Mail suggests that while lower rates are designed to encourage spending, the shouldn’t serve as an argument against saving.
Bank of Canada’s next rate announcement is scheduled for early March, and given the current prices on oil, TD predicts that the bank may slash its overnight lending rate by another 25 basis points next month.