Bank of Canada keeps overnight interest rate unchanged at 0.50%.
After a WILD March that saw the Bank of Canada make three -0.50% rate cuts to the policy rate we are finding our new “normal”.
Today was the Bank of Canada’s scheduled April policy update. There was no surprise when they announced no further changes to the bank rate.
While the Covid-19 pandemic has caused the Canadian economy to contract in dramatic fashion the Bank of Canada is clearly indicating that they will not be considering any further drops to the overnight rate. They consider the current level to be the “lower bound”. Instead of lowering rates they will support the Canadian economy with other stimulus and programs.
What does today’s decision mean to you?
Over the past few weeks mortgages lenders across the Canadian market have followed the Bank of Canada to lower their retail prime rates. At present the retail prime rate sits at 2.45%.
If you are currently in a variable rate mortgage now is not the time to convert to fixed.
Variable rate mortgage tip: if you have a variable rate mortgage consider taking advantage of your pre-payment privilege and increase your monthly payments to the amount you were paying in February 2020. The extra money will go directly towards principal and accelerate the repayment of your mortgage saving time and interest.
What’s up with current mortgage rates?
Interpreting recent changes to current mortgage interest rates is confusing. While the Bank of Canada has been lowering the prime rate which dominates the headlines, mortgage lenders have actually been trending the opposite direction increasing their rates. This is counter intuitive at first as we would expect rates to be lower.
Due to the amount of uncertainty and risk surrounding the current financial environment money is quite expensive. This despite the best efforts by the Canadian Government to keep it accessible and cheap.
The result is that rates are higher today than when the crisis began at the beginning of March.
For example on March 1st average 5 year fixed rate was 2.54% today the same rate is 2.94%.
Similar with variable rate mortgages. March 1st the rate was P-.70% where as today the same variable is priced at P+.20%.
There is no question that the global economy will be plunged into an economic recession. As we come out of social isolation and build back up the “risk” premium on interest rates should subside and I believe will enter into a long period of low interest rates like we saw after the 2008 crash.
So be patient if you need to renew your mortgage or refinance.
Next scheduled Bank of Canada meeting will be Wednesday, June 3, 2020.
If you would like to discuss how today’s interest rate decision effects you, email me directly or click on the link below and schedule a call time.