In case you missed all the buzz about it this morning, the Bank of Canada has cut their benchmark rate by 25 basis points, to 0.50%. While this was widely predicted by many in the finance world, this does mean some changes for home buyers in the real estate market.
A drop in the overnight rate, means a drop in mortgage rates, and many banks and lenders are already following suit. But if you’re unsure why the Bank of Canada rate affects mortgages, here’s a quick lesson on why the two are synonymous.
This is the interest rate at which banks borrow and lend funds amongst themselves. This can also be known to many as the key interest rate, which is the rate the Bank of Canada sets out.
Overnight rates alter the cost of lending and borrowing short-term funds, and influences the prime rate, and variable mortgage rates are linked to the prime rate. Variable mortgage rates fluctuate each month based on the lender’s prime rate. Essentially, when the overnight rate drops, mortgage rates drop.
The loonie lost more than a cent to 77.27 cents US in reaction to the news — the lowest level seen since 2009, when Canada was in a recession. All things being equal, rate cuts normally drive currencies lower because they make the country’s economy less attractive to foreign investors. — CBC News
The best strategy for a home buyer that’s buying a home to live, and not an investment property, is to focus on minimizing the interest paid on this debt. — Money Sense
If you have questions about the latest Bank of Canada rate announcement, or mortgages in general, feel free to contact me.
