With the Bank of Canada announcing yet another interest rate cut—a half-point reduction this morning—its key policy rate has now fallen to a two-year low of 3.75%. This is the fourth rate cut this year, continuing to lower interest costs for those with loans tied to the prime rate.
What this means for variable-rate mortgage holders
If you’ve got a variable-rate mortgage, your interest costs are about to drop—again.
Today’s rate cut works out to roughly $30 less in monthly payments per $100,000 of mortgage debt based on a 25-year amortization. For a typical $400,000 mortgage, that translates to savings of about $120 each month. If you add up the previous cuts this year, your monthly savings have likely grown to over $300 per month since the Bank of Canada started lowering its policy rate from its peak of 5%.
It’s important to note the difference between two types of variable-rate mortgages: fixed payment variable-rate and adjustable-rate.
Adjustable-rate mortgages: With an adjustable-rate mortgage, both your interest rate and your monthly payment change with fluctuations in the prime rate. This means you’ll see an immediate reduction in your next mortgage payment following today’s rate cut. For a $500,000 mortgage, expect to save about $150 per month after the prime rate falls.
Fixed-payment variable-rate mortgages: With this type of mortgage, your monthly payment stays the same even when interest rates fluctuate. However, the portion of your payment that goes towards interest versus principal will change. With today’s rate cut, more of your payment will go toward reducing your mortgage principal, meaning you’ll pay off your mortgage slightly faster.
What about fixed-rate mortgages?
For those with fixed-rate mortgages, today’s cut won’t directly impact your current payments, since your rate is locked in for the term.
But fixed rates have already seen their own reductions in the past few months. While the trajectory hasn’t been a straight line, lenders have steadily been cutting fixed mortgage rates, coinciding with the steady decline in Government of Canada bond yields, which lead fixed mortgage rate pricing.
While a rise in bond yields earlier this month caused some lenders to start raising fixed mortgage rates, experts think the downward trend will resume.
“Bond yields continued to fall last week as investors raised their bets on a 0.50% rate cut by the BoC…” wrote rate expert Dave Larock in his latest blog post.
“Lenders have already started to lower their fixed rates in response, and it shouldn’t take too much longer for the round of fixed-rate hikes we saw two weeks ago to completely unwind.”
HELOCs and personal lines of credit
Today’s rate cut isn’t just good news for mortgage holders. If you have a Home Equity Line of Credit (HELOC) or a personal line of credit, you’re in for some savings too.
These products are tied to the prime rate, which usually adjusts in line with the Bank of Canada’s rate changes. As prime rates drop, the interest costs on your line of credit will follow suit, putting more money back in your pocket each month.
Based on the average HELOC balance of $37,500, according to recent data from Mortgage Professionals Canada, borrowers would see a reduction in interest costs of around $18 per month following today’s 50-bps rate cut. This is assuming the prime rate falls to around 5.95% at most major lenders.
What’s next?
Most economists expect the Bank of Canada to keep cutting rates at its final policy meeting in December, and further into 2025.
As we recently reported this week, some big banks are adjusting their forecasts to reflect deeper rate cuts by the end of next year.
RBC, National Bank, and Caisse Desjardins are predicting an additional 175 basis points (1.75 percentage points) of rate relief by the end of 2025, which would bring the Bank’s policy rate down to 2.00%. That could translate into a prime lending rate of around 4.20% at most major lenders.
Now’s a great time to review your mortgage strategy. If you’re thinking about whether to stick with variable or lock into a fixed rate, your mortgage broker can help you decide what’s best based on your unique situation.
