The Bank of Canada started off 2015 by announcing a reduction in the overnight rate by 25 basis points. On January 25th, the rate dropped to 0.75 per cent. Considering the overnight interest rate has sat at 1 per cent since September 2010, this drop in rate caught many by surprise.
What was more surprising to some was the reaction - or lack of reaction - from Canada's big five banks. While Canada's banks have historically followed the Bank of Canada's rate changes within hours, sometimes minutes, with a similar cut in rate, this time that wasn't the story.
It took a full week for Canada's banks to respond. When they finally issued statements they came up short against the Bank of Canada's reduction, announcing a 15 basis points reduction instead of the full 25, leaving the banks' new Prime rate at 2.85 per cent. This slow and uneven reaction from Canada's banks drew in much criticism as many pointed out that the intended purpose of variable rate products is to correlate directly with Prime rates.
What does this drop in bank rates mean for your mortgage?
That depends - if you have a fixed rate mortgage that isn't up for renewal, then this news may not impact you quite yet. However, if you have a variable rate mortgage or combination of fixed and variable rate mortgage, you will likely see a slight drop in your rates.
If you are going to be buying a new home, if you have a fixed rate mortgage that is up for renewal, or you were thinking about locking into a fixed rate, now is a good time to shop around for a rate on KANETIX.ca. While the Prime rate doesn't directly correlate with the fixed rates that banks offer, this sudden drop has pushed some banks to drop their fixed rates to highly competitive lows.
What does a 15 basis point interest rate decrease mean to the average Canadian mortgage holder in dollars?
According to a report released by the Canadian Association of Accredited Mortgage Professionals (CAAMP), the average purchase price for a home in Canada during 2014 was $400,000, and the average mortgage for the estimated 375,000 homeowners who took out a mortgage to purchase their home was roughly $300,000.
For example, using KANETIX.ca's mortgage calculator, the average mortgage amount of $300,000, when amortized over twenty-five years, the 15 basis point interest rate decrease amounts to about $25 per month. (At 3.00% the payment is roughly $1420 per month and at the new 2.85% rate the monthly payment would be approximately $1397, for a difference of $23 per month or potentially $276 annually.)
What would the extra 10 basis points really mean to Canadians?
Using the same example from above, on a $300,000 mortgage this drop in Prime rate would mean that the banks would gain an average of $15 extra each month from the 10 basis points they're keeping. This gain for Canadian banks has caused further criticism and was even called unethical by some.
While it may sound unfair, there are always two sides to the story. It has been reported that implementing only part of the Bank of Canada's discount could be in an effort to protect the Bank's profit margins. Since rates are already quite low, banks don't have the room to cut them much further.