The Bank of Canada (BOC) announced another half-point, i.e. 50 bps interest rate cut, bringing its benchmark policy rate to a two-year low of 3.75%. This is the fourth rate drop this year, lowering interest rates for borrowers with loans connected to the prime rate. From 5% in the starting of the year to 3.75% near the end, this year the mortgage rates have witnessed the best rate cuts.
How Is It Going To Impact Variable-rate Mortgage Holders?
If you have a variable-rate mortgage, your interest payments are set to decrease again. Based on a 25-year amortization, today’s rate drop is around $30 less in monthly payments per $100,000 of mortgage debt.
For a typical $400,000 mortgage, this corresponds to a monthly savings of approximately $120. If you add up the prior decreases this year, your monthly savings have most certainly increased to more than $300 since the Bank of Canada began cutting its policy rate from its peak of 5%.
What About Fixed Payment & Adjustable Rate Variable Mortgages?
For fixed payment variable rate mortgage holders, the latest rate cut will help in reducing your mortgage principle amount and allow paying off the pending amount a little faster.
For adjustable rate mortgage holders, after this prime rate cut, they are expected to save $150 per month approximately on a $500,000 mortgage.
What About Fixed Rate Mortgages?
For individuals with fixed rate mortgages, the latest reduction will have no immediate impact on their current payments because their rate is locked in for the duration.
However, fixed rates have already fallen in recent months. While the path hasn’t been a straight line, lenders have progressively been decreasing fixed mortgage rates, corresponding with the steady decrease in Government of Canada bond yields.
While an increase in bond yields earlier this month prompted some lenders to raise fixed mortgage rates, analysts believe the downward trend will continue. Lenders have already started to lower their fixed rates in response, and it shouldn’t take too much longer for the round of fixed-rate hikes to completely unwind.
What About HELOCs and Personal Lines of Credit?
The recent rate drop is excellent news for more than just mortgage borrowers. If you have a Home Equity Line of Credit (HELOC) or a personal line of credit, you will also benefit from discounts.
These products are linked to the prime rate, which typically adjusts in tandem with the Bank of Canada’s rate increases. As prime rates fall, so will the interest rates on your line of credit, putting more money in your pocket every month.
According to recent Mortgage Professionals Canada data, borrowers with an average HELOC amount of $37,500 would save around $18 per month as a result of today’s 50-bps rate cut. This assumes that the prime rate decreases to roughly 5.95% at most major lenders.
Want to know more about the latest rate cut and how it will impact your existing mortgage payments? Talk to our expert mortgage brokers in Abbotsford, Surrey, and Edmonton.