The Bank of Canada's decision to lower its key lending rate by a quarter point to 4.50% brings another small bout of relief to many borrowers, namely those with variable-rate products.
This follows a previous rate cut in June and continues the central bank's easing cycle, with further reductions anticipated later this year and into next year.
During today's post-announcement press conference, Bank of Canada Governor Tiff Macklem highlighted that future rate cuts will depend on inflation trends. "If inflation continues to ease and our confidence in reaching the 2% target grows, further rate cuts are likely," he said.
Here’s a look at how different types of mortgage borrowers will be impacted by today’s interest rate cut.
Immediate impact on variable-rate mortgage holders
Variable-rate mortgage holders will feel the most immediate effects of today’s announcement. Their rates are influenced by Bank of Canada rate changes through their lender’s prime rate. In the coming days, Canada's Big 6 banks and other financial institutions are expected to lower their prime rates to 6.70%, with the notable exception of TD Bank, whose mortgage prime rate is slightly higher.
Variable-rate mortgage holders will be impacted differently based on whether they have adjustable-rate or fixed-payment mortgages:
- Adjustable-rate mortgages: Those with adjustable-rate mortgages, whose payments fluctuate based on interest rate changes, will see immediate financial relief. Typically, a 25-basis point decrease translates to about $15 less per month for every $100,000 of mortgage debt, assuming a 25-year amortization period.
- Fixed-payment variable-rate mortgages: Those with fixed-payment variable-rate mortgages, which make up roughly 15% of outstanding mortgages in Canada, will not see a change in their monthly payment amounts. However, a larger portion of each payment will now go towards reducing the principal, while the interest portion decreases.
No impact on fixed-rate mortgage holders
Fixed-rate mortgage holders won't be affected by the Bank of Canada's rate cut, as their interest rates are locked in for the term of their mortgage. These rates are determined by Canadian bond yields, not by the Bank of Canada's prime rate changes.
Broader implications for borrowers
Beyond the effects on mortgage holders, the rate cut will also influence other types of borrowing. Interest rates on lines of credit, personal loans, and other variable-rate debt will decrease following changes to the prime rate, making borrowing slightly cheaper across the board.
For prospective homebuyers, lower interest rates may improve affordability slightly, enabling them to qualify for larger mortgages or reduce their monthly payments.
Looking forward, it’s reasonable to expect rate cuts to continue towards the end of the year and into 2025. Economists noted today’s more dovish tone by the Bank of Canada, suggesting it may be growing concerned about weaker economic growth forecasts.
“The downside risks are taking on increased weight in our monetary policy deliberations,” noted Macklem during his press conference. “We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2% target."
Most of the big banks currently expect one or two more quarter-point rate cuts by the end of the year. There are three more BoC meetings scheduled for September, October and December.
If you have questions about how these changes might impact your mortgage or borrowing options, don't hesitate to reach out to me for personalized advice and guidance.