How Bank of Canada rate cut affects mortgages, loans, investments

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The Bank of Canada has lowered its key interest rate by a quarter of a percentage point to 4.75 per cent, the first cut in more than four years. Here’s what it could mean for your finances.

What does it mean for consumers and prime rates?

The Bank of Canada’s benchmark rate affects borrowing costs for banks, which means they’re able, but not forced, to lower their own lending rates.

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Banks are generally very quick to move their prime rate higher in tandem with Bank of Canada hikes. They’ve been less consistent on the way down. But when the central bank last lowered its rate four years ago, banks did follow suit within a day.

Canadian banks also have more flexibility in deciding to cut than they used to. Banks choose how much interest they add to the Bank of Canada rate, and that buffer has widened over the past couple of decades.

From the mid-1990s to 2008, the added margin averaged around 1.5 per cent. It rose to 1.75 per cent until around 2015, and since then has stood at around two per cent added to the bank rate.

What does it mean for my mortgage?

If banks move their prime rate down, it will have an immediate effect on borrowers with variable-rate mortgages, just as they’ve felt the brunt of rising rates.

Those with a fixed-rate mortgage will not see their payments change until it comes time to renew their loans.

Fixed-mortgage rates are determined by what happens to the bond market, which, while also affected by Bank of Canada rate decisions, is based on overall investor confidence. The market had already largely priced in the rate cut.

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How much savings on a mortgage can be expected from the rate cut?

A quarter percentage point cut doesn’t translate into a major change in monthly mortgage payments. Someone with a $600,000 mortgage, 25-year amortization and a six per cent interest rate would save about $88 a month if the rate was 5.75 per cent.

Bank of Canada governor Tiff Macklem did say it’s “reasonable” to expect further cuts, but that the bank is making its interest rate decisions one at a time.

TD is predicting the central bank will cut rates two more times by the end of the year to bring the benchmark to 4.25 per cent, while CIBC and RBC are predicting three more cuts which would bring the key rate to an even four per cent. A full percentage point off the $600,000 mortgage would translate into about $349 a month in savings.

What does it mean for lines of credit and credit cards?

Lines of credit are generally tied to bank prime rates, so borrowers should see some savings if banks reduce their prime rates.

Credit card rates are more fixed, so consumers shouldn’t expect much of a break there.

What does it mean for my savings account rate and Guaranteed Investment Certificates?

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Savings accounts and GICs have seen higher returns as rates rose, and could see that reverse if prime rates go down in line with the Bank of Canada.

The relationship between borrowing costs for financial institutions and savings rates isn’t strictly linear though, said Shannon Terrell, a personal finance expert at NerdWallet. But banks generally move down savings rates to compensate for the lower lending rates they’re offering.

She said customers could see rates start to go down on savings products in the coming days or weeks, with most following suit once one has.

Overall, she said it can be a good time to comparison shop as smaller banks, digital banks and credit unions may keep savings rates higher in an effort to lure customers.

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