As was widely speculated over the last few weeks, the Bank of Canada has lowered interest rates by a quarter point to .50% from .75%, the second drop in 2015 of the overnight rate. Prior to January 2015, the Bank of Canada overnight rate had remained steady at 1.00% since September 2010. The decrease in the Bank of Canada rate today is meant to help prop up the Canadian economy as the rebound in the economy from falling oil prices has not materialized as hoped through greater exports.
Similar to the last Bank of Canada rate reduction, it appears that the major banks are not intending to decrease their prime consumer lending rate by a corresponding amount. In January of this year, the Bank of Canada reduced their overnight rate by .25%, while banks passed a .15% decrease over to their customers.
At least one bank has announced a drop in their prime rate by .10% today from 2.85% to 2.75%, it is expected that other banks and lenders will follow suit.
What does this mean to the average Canadian mortgage consumer?
What else is happening with rates?
While Variable rate mortgages are dependent on the Bank Prime rate, and by extension the Bank of Canada rate, Fixed Term Mortgages are dependent on the long term bond market. Sometimes these two economic indicators move together, and sometimes they move in different directions causing a wider gap between the current 5 year Variable Rate Mortgage rates, and the 5 Year Fixed Mortgage rates.
At the time of the last Bank of Canada rate change in January of 2015, bond rates were also at record lows. In the period between January and June of this year, we have seen bond yields inch slowly upward, reducing margins and putting pressure on fixed term interest rates. Five year yields reached a peak in June, and have been on the decline in the last few weeks. In this rapidly changing rate environment, we may see more short term lender specials to encourage consumers to take advantage of the current rates within 45 or 60 days rather than the longer term 120 day rate guarantees for their standard rates.