The Bank of Canada finally gave many of us some good news, dropping the overnight lending rate by .25% to 4.75%. This will trigger the banks to drop their Prime rates by .25% down to 6.95%, reducing interest and possibly payments for all borrowers on variable loans. This is the first time the Bank of Canada has reduced rates in 4 years. 

When does this take effect?

If you are in a fixed payment variable mortgage, then your payments will not change. Instead, more of your payment will go towards principal and less towards interest. Most major banks have a fixed payment variable product.

If you are in an adjustable mortgage, then it is likely that the payment after the immediate upcoming payment is the one that will drop. The principal and interest amount will be accounted for on that payment specifically.

How much of an impact is this?

Per $100,000, the interest cost will decrease by about $14 per month per $100,000, depending on the rate and amortization. For lines of credit, the decrease in payments will be about $21 per $100,000.

How does this affect fixed rates?

Fixed rates and variable rates move independently, as fixed rates are highly correlated with the bond market. Typically the bond market prices in future decreases and has had a 50% decrease priced in for a few months now. On Friday, this ticked up due to some encouraging inflation numbers in both Canada and the US. With the move by the BoC today, along with some further weakening data coming from the US, the bond market dropped again resulting in .4% in decreases since Friday. Although we wouldn’t have expected much of a change in rates, the expectations for the next cut are moving forward and so the bond market is starting to assume rates will come down a bit more than expected. 

When will the Bank of Canada drop next?

Well, this is the million dollar question, but currently the market is pricing in a 40% chance of a cut in July, a 100% cut by Sept and one more cut by Dec. This would mean in total .75% in cuts in 2024. The pendulum swings on this data quite frequently, so stay tuned on future changes to these predictions.

What is better – variable or fixed?

Technically variable has been either pricing out as the same or better since September of last year. With the first cut now “in the bank”, we will be updating our variable vs fixed comparison tool but we expect variable to outperform a fixed over the next 3 years. As of right now, a variable is expected to cost about $7,000 less over 3 years on a variable than on a fixed, but there are a number of reasons to still consider a fixed rate.                                                       

Summary

We are too early to tell if this is finally the beginning of a slow slide downwards, but it is at least a start. We will watch the market intently to see what comes out of this.

If you are in a variable mortgage and want to ride the variable wave longer, and your discount off of prime is .6% or less, then it may make sense to reach out to us to see if it makes sense to refinance for a deeper discounted variable. Many lenders are offering around Prime -1% right now for a variable mortgage.

-Kyle Green