…interest rates will continue to stay low for the foreseeable future.
Eight times a year, the Bank of Canada releases an interest rate announcement regarding their key lending rate – the overnight lending rate. It’s the overnight lending rate which influences the variable mortgage rates offered to home owners by Canada’s largest banks and lending institutions.
Factors such as the strength of the Loonie, household debt levels, the Canadian economy and low levels of inflation are some of the reasons why the Bank of Canada has indicated that they feel comfortable keeping interest rates where they are today. While things can certainly change – the Bank of Canada has not increased the overnight lending rate since September 2010. Since September 2010, the Bank of Canada has halved their overnight lending rate from 1.00% to the 0.50% rate today.
Each rate movement has typically been increments of 0.25%. The first move from 1.00% down to 0.75% took place in January 2015 while the second rate cut was in July of that same year.
What does the Bank of Canada’s decision mean for home owners?
Ultimately, home owners are likely to see a continued period of historically low mortgage rates. It will be of interest to see how banks and other lenders continue to compete for mortgage business as rates continue to stay so low.
One example of the way banks have changed their business was in the decision not to pass along the Bank of Canada rate cut to consumers in its entirety back in January and July of 2015. Typically, the ‘prime rate’ that banks offer to consumers has moved in lock step with the Bank of Canada’s overnight lending rate; however, banks only passed on a 0.30% discount from the Bank of Canada’s 0.50% decrease – increasing the bank’s profit margins on the money lent out to consumers. If rates continue to stay low over an increasingly long period of time, the banks may rely on other methods to stimulate profit.
One possibility is the decision to tighten the variable rate mortgage.
The variable rate mortgage has been nothing short of a home-run for home owners who opted for the product since 2009. Rate offers such as Prime – 0.90% were not uncommon five or six years ago; however, in the past couple of years, those discounts have tightened closer to Prime – 0.30%.
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