The Bank of Canada has cut the overnight rate for the first time in four years, a welcome relief to borrowers nationwide. The prime rate, which sits at 2.2% above the overnight rate, will subsequently drop from 7.2% to 6.95%. Variable and adjustable rate borrowers, as well as borrowers with Home Equity Lines of Credit (HELOCs), will all benefit.
Economic Insights
The Bank noted the US is showing deceleration in economic activity, and conversely, activity picked up in the euro area during the first quarter of 2024. China’s economy is growing, driven by exports and industrial production, though their domestic demand is still weak. Overall, inflation is continuing to ease globally in most advanced economies.
The Bank also noted that in Canada, after stalling in the latter part of 2023, economic growth resumed, though more slowly than forecasted. Employment growth was also cited as being slower than that of the working-age population, but with wage pressures moderating.
The full press release can be viewed via this link.
What Does This Mean For Borrowers?
The reduction in the overnight rate will translate into more favorable borrowing costs for property owners and potential buyers.
Variable rate borrowers with payments that don’t change with changes in the prime rate will see a reduction in mortgage interest costs, but their payments will remain the same. Most major banks’ variable mortgage payments stay the same with changes in the prime rate. Adjustable rate borrowers will see a reduction in interest costs and their payments will drop accordingly.
HELOC rates will also drop with today’s .25% reduction in the overnight rate.
The drop in the prime rate will not affect fixed rate borrowers’ mortgage rates or payments. Though with bond yields dropping recently, a reduction in fixed interest rates may be on the horizon too.
Extent of Interest Rate Savings
Depending on the rate and amortization, mortgage interest costs per $100,000 will decrease by approximately $14 monthly. Borrowers will save about $21 monthly on lines of credit interest costs per $100,000.
Strategic Financial Planning
Expectations for further cuts this year are for a 40% chance of another reduction in July, a 100% chance of another cut by September, and another by December. Predictions roughly total a reduction of .75% off the prime rate for 2024.
I am here to help you navigate the implications with strategic advice tailored specifically for you.
If you’d like a review of the opportunities as they relate to growing your net worth, please feel free to be in touch. I am always happy to help.
Image Credit: Sasan Hezarkhani, Unsplash