In an unprecedented move, the Bank of Canada cut its key interest lending rate by ¾ of a percent today; this is the lowest rate since 1958 when it was 1.12%.
The National Post called the cut “radical” and many economists had predicted that at most, the Bank of Canada would decrease rates by a ½ percent, however in a surprise, with the ¾ percent decrease the lending rate has been lowered to 1.50%.
TD Canada Trust was the first Bank to lower its Prime Rate in response to the rate change, and have dropped their Prime Rate by ½ a percent, with CIBC following suit shortly thereafter.
Why they didn’t match the ¾ percent Bank of Canada drop has not yet been explained; however, speculation says that because the margin of profit on variable rates is currently so low, most other banks will follow TD’s ½ percent drop.
What is the Overnight Lending Rate?
The overnight rate is the interest rate at which major financial institutions borrow and lend one-day, or overnight funds among themselves; the Bank sets a target level for that rate, which is often referred to as the Bank’s Key Interest Rate.
In November 2000, the Bank introduced a system of eight “fixed” dates each year on which it announces whether or not it will change the key rate policy.
Changes in the overnight rate influence other rates, such as those for consumer loans and mortgages, and can also affect the exchange rate of the Canadian Dollar.
So, what does this Lending Rate Cut mean for you as a mortgage holder?
As a variable rate mortgage holder, your Interest Rate is directly affected by the Bank of Canada Lending Rate. As this rate decreases and lenders react to the decrease by dropping their Prime Rate, the amount of interest you pay on a monthly basis decreases. As an example, if your rate through TD is Prime Minus 0.50% and TD just cut its Prime from 4.00% to 3.50%, then your Mortgage Interest Rate just dropped to 3.00% (Prime of 3.50% Minus 0.50%). This is great news for Variable Rate Mortgage Holders.
A common question that we as Mortgage Specialists encounter is: “should I choose a variable rate or a fixed rate mortgage?”
For more information on whether a fixed or variable rate mortgage is right for you, reference our Frequently Asked Section at
For more information on whether a fixed or variable rate mortgage is right for you, reference our Frequently Asked Section at http://www.mbnmortgage.com/resources/frequently-asked-questions/.
MBN Mortgage
Bank of Canada
