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Bank of Canada lowered their key interest rate for the first time in over four years by one quarter of a point. What it might mean to your financial situation.
Prime rates and consumers: What do they mean?
Bank of Canada benchmark rates affect borrowing costs, so banks are able to, but not required, lower their lending rates.
Banks tend to be very fast in raising their prime rates when the Bank of Canada increases its rate. On the way down, they’ve tended to be less consistent.
On Wednesday, the majority of banks had reduced their prime rate to 6,95%, from 7,2%. This was effective on June 6.
Canadian banks are more flexible than ever in their decision-making. Banks can choose the amount of interest to add to Bank of Canada’s rate. This buffer has grown over the last two decades.
The added margin was around 1.5% from the middle of the 1990s until 2008. The margin rose from 1.75% to around 2015. Since then, it has been around 2 per cent.
What is the impact on my mortgage?
The banks lowering prime rates have an immediate impact on variable rate mortgage borrowers, who’ve already felt the effects of increasing rates.
If you have a mortgage with a fixed rate, your payments will remain the same until it’s time to renew.
The rate of fixed-mortgage mortgages is determined by the performance of the bond markets, and while Bank of Canada decisions are also a factor, overall investor confidence plays a major role. Markets had already priced the cut in.
What savings can you expect on your mortgage due to the new rate?
The monthly payment of a mortgage won’t change much if you cut a quarter point. If a mortgage of $600,000.25-year amortization at 6% interest was reduced to 5.75%, a person with this mortgage would be able to save $88 per month.
Tiff Macklem, the governor of Bank of Canada said that it is “reasonable to expect” further interest rate cuts. However, she added that each bank makes its own decisions about rates.
TD predicts that the central bank is going to cut rates twice more by the year’s end, bringing the benchmark rate down to 4.25%. CIBC and RBC expect three additional cuts to get the main rate up to a four percent. Savings of $349 per month would be possible if the mortgage rate was cut by a full percentage.
What is the difference between credit lines and credit cards
Bank prime rates are usually tied to the rates of lines of credit, which means that borrowers can expect some savings when banks lower their rates.
The credit card rate is more set, and consumers should not expect to see much in the way of discounts.
What is the difference between my Savings Account Rate and Guaranteed Investment Certificates (GIC)?
GICs and savings accounts have seen higher rates as the rates increased, but this could reverse itself if rates fall in line with Bank of Canada.
Shannon Terrell is a NerdWallet personal finance expert. She said that the relationship between financial institution borrowing costs and savings rates are not linear. Banks generally lower their savings rates in order to offset the low lending rates.
In the next few days, she said that customers will see savings rates drop.
She said that it is a great time to compare banks as digital banks, smaller banks, and credit unions will often keep their savings rates high to attract customers.
The Canadian Press published this report on June 5, 2024.