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Variable-rate borrowers finally received some relief today as the Bank of Canada announced a 25-basis-point reduction in its overnight target rate,
bringing it down to 4.75%. This marks the bank’s first rate cut in over four years.
The Bank of Canada expressed increased confidence that inflation is moving towards its 2% target, though it acknowledged that risks of higher inflation remain.
Prime Rate to Drop to 6.95%
As a result of this cut, banks and financial institutions are expected to reduce their prime lending rates by a similar amount, bringing the prime rate to around 6.95% in most cases. Notably, TD Bank remains an exception among the Big 6 banks, with its mortgage prime rate set 15 basis points higher due to an independent rate hike in 2016.
The prime rate, which influences variable-rate mortgages and personal and home equity lines of credit (HELOCs), generally follows changes in the Bank of Canada’s overnight target rate. The current reduction translates to savings of approximately $15 per $100,000 of loan, or around $60 for recent first-time homebuyers with an average mortgage balance.
However, not all variable-rate mortgage holders will see a change in their monthly payments. Those with fixed-payment variable mortgages will see the interest portion of their payments decrease, while more of their payment will go towards principal repayment.
Future Rate Cuts: What to Expect
Bank of Canada Governor Tiff Macklem stated that future rate-cut decisions will be evaluated on a meeting-by-meeting basis, contingent on inflation trends.
“If inflation continues to ease and our confidence in reaching the 2% target grows, further rate cuts are reasonable,” Macklem said during a news conference.
BMO Chief Economist Douglas Porter emphasized that while today’s cut is significant, marking a shift after over two years of restrictive policy, it is likely the first in a series of cuts that will not follow a straight downward trajectory.
Currently, the likelihood of another rate cut at the Bank’s next meeting in July stands at just 11%. Mortgage broker and rate expert Ryan Sims predicts a possible cut in the fall, with a slim chance of another cut by year-end. However, he cautioned that if consumer spending increases in response to today’s cut, inflation could rise again, potentially putting rate hikes back on the table.
Major banks forecast the benchmark rate to fall to between 4.00% and 4.25% by the end of the year. TD senior economist James Orlando suggested that the Bank of Canada will proceed cautiously to prevent inflation from rebounding and to avoid reigniting the housing market, with the next cut likely occurring in September.
This blog was inspired by and based on the article "Canadians Leaving Money on the Table by Not Negotiating Their Mortgage Renewal Rates" from Canadian Mortgage Trends.