If you own a home or are thinking of buying one, the Bank of Canada brought some significant good news this past week when it cut interest rates for the second time in as many months. For other borrowers, the cut will also provide some needed relief.
Citing an improved inflation outlook, the BoC lowered its main interest rate by a quarter of a point. The overnight rate target now stands at 4.5%, down from 5.0% two months ago.
In addition, BoC governor Tiff Macklem signaled that further rate cuts are likely. Economists expect at least one more cut this year.
Here’s a look at what the cuts mean when for mortgage rates, credit card rates, and other rates critical for consumers.
Mortgage Rates: A Respite in the Works
For the millions of Canadians with mortgages, lower interest rates offer real relief to those with variable-rate mortgages, those whose mortgages are coming up for renewal, and those waiting to get their foot in the homeownership door.
“The timing could not have come sooner, as many Canadians [who locked in ultra-low rates] still have not felt the impact of higher mortgage rates and will do so in the coming years,” says Sadiq Adatia, chief investment officer at BMO Global Asset Management.
The most immediate benefit will come for those holding variable-rate and adjustable-rate mortgages. Both these mortgage types are tied to the prime rate, which is influenced by the BoC's overnight rate but set by banks. Prior to this week’s rate cut, the prime rate offered by many banks in Canada was just under 7%.
Along with the rate cut, some borrowers will see their mortgage rates fall by a quarter of a percentage point. “Those with adjustable-rate mortgages will also see their payments decrease,” says Sean Cooper, a Toronto mortgage broker and author of Burn Your Mortgage. “Those with variable-rate mortgages won't see their payment change, but they will have more of their money going toward principal and less toward interest,” thus accelerating repayment.
Adatia cautions that despite the recent cut, mortgage rates remain elevated in Canada. “[The rate cut] will not completely remove the higher mortgage payments borrowers will pay, [but it] will provide some cushion relative to where mortgages were at just a few quarters ago,” he says. He stresses that this is particularly important for those with variable mortgages who have already seen a big jump.
There remain “affordability challenges in Ontario and British Columbia where interest rates are still at restrictive levels,” cautions Sal Guatieri, senior economist at BMO.
The downward trend may also affect fixed-rate mortgages, potentially making a switch from variable to the more transparent and predictable fixed-rate option more appealing. It could also make the case for mortgage refinancing to those locked in long-term fixed-rate mortgages at significantly higher rates.
Importantly, the benefit goes beyond the near term. Canada is approaching what some real estate analysts call a "mortgage renewal cliff." Homeowners who secured ultra-low rates during the pandemic may face a sharp spike in mortgage payments when their mortgages renew in 2025-26. This increase will affect both variable and fixed mortgage holders.
Limited Relief for Credit Card Users
The cut will have a negligible impact on credit card holders. Credit card interest rates are typically much higher than mortgage rates, and any reduction in prime rate or mortgage rates will have little or no direct impact on credit card users.
“Credit card rates don't tend to change when the Bank of Canada adjusts interest rates,” explains Cooper, who adds that it’s probably best to pay off any card debt you have.
However, with lower interest rates making personal loans and lines of credit more favorable, some might consider using these options to pay off high-interest credit card debt and save on interest payments. It is prudent, though, to consult a financial advisor to evaluate individual financial circumstances.
A Mixed Bag for Other Borrowers
The impact of rate reduction on other types of debt, such as personal loans and lines of credit, varies but is noteworthy. While new borrowers may benefit from lower interest rates, those with existing fixed-rate loans will not see immediate changes.
Those looking to take out a personal line of credit or a personal loan may enjoy cheaper borrowing costs. Both these loans are directly tied to the prime rate, which is influenced by the BoC’s overnight rate. A drop in the overnight rate leads to a lower prime rate, which in turn reduces interest rates on lines of credit and personal loans.
Those in need of such loans may want to wait until the latest rate cut has had the time to work itself into their borrowing costs.
Those with existing loans may want to evaluate their current loan terms and consider refinancing if it makes financial sense.
For those with lines of credit, this rate adjustment could result in decreased interest charges. However, it's important to note that lines of credit could become more expensive if the BoC changes direction and starts raising rates. It's important to use lines of credit responsibly and avoid carrying high balances.
A Cautious Approach
While the rate cut offers some potential benefits for borrowers, it's essential to approach the situation with caution. The impact on individual financial circumstances will vary depending on factors such as the type and size of debt, interest rate terms, and personal financial goals.
The best course of action is to carefully assess your financial situation and consider seeking advice from a qualified financial expert. By making informed choices, you can optimize the benefits of the rate cut while minimizing risks.
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