Bank of Canada Cuts Interest Rates
Still dealing with the aftermath of low oil prices, the Bank of Canada cuts interest rates. Canada’s central bank announced on Wednesday it’s lowering the overnight lending rate by 25 basis points to 0.5 percent, down from 0.75 percent. This marks the second time the BoC has lowered interest rates in 2015. Previous to that, BoC froze interest rates at 1 percent for almost five years. Unlike January’s interest rate cut, this one was hardly a shocker. Many economists had been calling for an interest rate cut this time around.
Although the BoC shied away from using the “R-word” (recession), our central bank said our economy is likely to have shrunk by 0.6 percent in the first quarter and 0.5 percent in the second quarter. With negative GDP growth in two straight quarters, this meets the textbook definition of a recession.
Lower Mortgage Rates on the Way
The big banks are once again being stingy, not passing the full 25 basis point rate cut onto consumers. TD Bank cut its prime lending rate by 10 basis points to 2.75 percent, followed by RBC and BMO, who cut prime rate by 15 basis points to 2.70 percent. In January the big banks were panned in the media for taking their sweet time cutting prime rate, so this is a nice change of pace. After the Bank of Canada cuts interest rates, consumers are enjoying record-low mortgage rates. Variable rate mortgages below two percent and 5-year fixed rates mortgages below 2.5 percent. If there’s ever been a time to buy a home, this is it.
Tougher New Mortgage Rules on the Way?
With lower mortgage rates here to stay, the Financial Post is suggesting Ottawa is considering tougher new mortgage rules and larger down payments to curb Canada’s red hot housing market. The newspaper says the government is looking at increasing the minimum down payment from five percent and adding restrictions to high-priced housing markets – mainly Toronto and Vancouver. Although nothing has been announced as of yet, it will be interesting if Ottawa follows through in the coming months.
What is the Overnight Lending Rate?
The overnight rate is the interest rate that the big banks charge to each other for borrowing one-day funds. A change in the overnight lending rate would be felt throughout the Canadian economy. The big banks set prime rate based on the overnight lending rate, plus a spread. Although the banks typically change prime rate based on the overnight lending rate, as we learned in January, there’s no guarantee the banks will pass on the full rate cut to borrowers.
Interest Rates and the Average Consumer
If you’re the average consumer, you may be wondering how interest rates affect your daily lives. The BoC’s trendsetting rate has more of an effect on the Canadian economy than you may realize.
If you’re a homeowner with a variable rate mortgage, you should keep a watchful eye on the overnight lending rate. Although the overnight lending rate has no direct relation to variable Canadian mortgage rates, mortgage lenders almost always move in lockstep with prime rate.
Homeowners aren’t the only one who benefit from a lower prime rate. Anyone with debt tied to prime rate will benefit. For example, if you have a Home Equity Line of Credit, Car Loan, Line of Credit or student loan that’s tied to prime rate, you reap the rewards of a lower prime rate.