On March 4th, the Bank of Canada cut interest rates as a response to the COVID-19 virus and resultant “negative shock” to the Canadian economy. The reduction saw the overnight lending rate drop by 50 basis points (0.50%), resulting in a rate of 1.25%. As a response, most Canadian banks have reduced their prime lending rate by 50 basis points to 3.45%.
Interest rates are generally lowered in order to stimulate the economy by increasing incentive for consumers to borrow, invest, and ultimately spend money. Consequently, a reduction in interest rates can potentially lead to excessive growth and inflation, which can erode the purchasing power of the population.
How Does this impact current financial products
For those who hold variable rate lending products or deposit accounts, you should expect to see a rate reduction immediately as interest rates are based on a discount or addition from the prime lending rate (eg. prime +/- 0.25%) at your financial institution. This will impact lines of credit, variable-rate mortgages, as well as other variable rate loans. For variable-rate mortgages with fixed payments, you will not see a reduction in payment, however, a larger portion of your payment will be allocated towards the principal of your mortgage.
The pricing of fixed-rate lending products is not tied to overnight lending rates in the same way that variable-rate mortgages are. Fixed mortgage rates are tied to bond yields, which will not be directly impacted by the recently announced rate reduction. Fixed-rate mortgages or loans will therefore not see any change to rate or payment from this recently announced change. For new mortgages or mortgage renewals, you can expect to see the rate on variable rate mortgages reduced immediately. Fixed-rate mortgages may eventually see a small reduction; however, you should not expect an immediate reduction to fixed-rate options at this time.
While many of our clients will see an immediate benefit from a rate reduction on a line of credit, feel free to reach out to a TPC Financial Group advisor to determine how these rate changes impact other areas of your specific situation.