What You Need to Know About the ’emergency’ Bank of Canada Rate Cut

March 14, 2020

Bank of Canada cuts overnight rate by an additional 0.50%.

 

By this point we all know the headlines and understand the implications both personal and abroad caused by the spread of Covid-19.  I fully support the measures and appreciate the seriousness and importance of slowing the spread of the virus especially to the most vulnerable in our community.

However for many households the greatest threat is not viral but financial.

The ripple effect throughout the economy will reverberate for months to come.

In an attempt to lessen the burden on households and businesses the Bank of Canada held an unscheduled emergency meeting before the weekend to introduce new policy. Along with a $10B stimulus package the BoC also communicated a rate cut to the overnight lending rate by 0.50%.

Full Bank of Canada press release can be read here.

 

What does this decision mean to me and my mortgage?

 

Last week’s cut (March 4th) to the overnight lending rate quickly translated into a cut of 0.50% to retail prime rates.

At the moment lenders are scrambling to determine how yesterday’s cut effects their businesses and how much of the rate cut will be translated again into a drop of the prime rate.

My personal opinion is that retail banks should pass along the full rate cut to consumers given the extraneous circumstances. It would be a bad look and PR mess if they don’t.

At the time of writing the prime rate for your mortgage and lines of credit sit at 3.45%. Assuming the full cut is passed along, the prime rate would drop to 2.95%. When we started the month of March the prime rate was 3.95%.

 

What’s happening with fixed rate mortgages?

 

Fixed rate mortgages have also dropped last week on account of dropping bond yields (chart here).

HOWEVER the drop is relative. We started the year with 5 year fixed rates ranging between 2.69% to 2.99%.  After recent events last week the 5 year fixed rates dropped to the range of 2.29% – 2.69%.

Current Tridac Mortgage rates.

 

Will the 5 year fixed drop further after yesterday’s emergency announcement?

 

I do not believe 5 year fixed rates will drop much further than their current level even after yesterday’s announcement. Keep in mind that 5 year fixed rates are based on bond yields which are driven by investor sentiment. Investors like government stimulus.

In fact Scotiabank announced at 5pm yesterday that they were INCREASING their fixed rates which came as a shock to me. I believe it’s a signal that they want to pull out of the exposure in mortgage risk temporarily while the Corona story develops further.

 

Is now a good time to refinance my fixed rate mortgage?

 

Not an easy answer to this one. Keep in mind that fixed rate mortgage contracts have a penalty clause based on IRD (interest rate differential). The IRD penalty is based on the differential between your current contract rate and the new lower market rate.

In most cases the penalty offsets any immediate savings from a lower fixed rate.

However if your fixed rate is over 3.09% there may be a good opportunity to save some money in the current environment.

If you want to review with me please contact your lender first and request the following information:

  • Penalty to break
  • Approximate outstanding balance
  • Exact maturity date

With the above information we can run an analysis and determine if it’s worthwhile refinancing now to a lower rate.


Next Bank of Canada meeting will be
Wednesday, April 15, 2020.

Profile

Christopher Molder

Mortgage Broker

Christopher is a mortgage broker based in Toronto, Canada. And a son of a broker too.He’s a second generation mortgage broker.Following in his father’s steps he joined the family mortgage business straight out of university.

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