Bank Interest Rate cut and your Mortgage Payment

March, 2020
Bank of Canada Rate Cut! March 2020!

What is the Prime Rate?

Prime Rate is the annual interest rate set by the banks on which the major banks (TD, BMO, RBC, National Bank, Scotiabank) base their lending rates or variable rate loans. 

For example, if you go to your bank for inquiring about your mortgage rate and you decide to go with a variable rate then the interest rate that you will be charged is based on the bank's Prime Rate. Usually, all the banks have their own prime rates which is more or less the same for all major banks to remain competitive. In this case, let's say the prime rate for all major banks is 3.95%. Your bank is offering your Prime minus one(prime-1) rate for the mortgage. Then your actual rate of interest for your mortgage will be 3.95 -1 % = 2.95%.

What is the Overnight Rate?


Now, when you know what is Prime Rate, we can now move forward to the Overnight Rate. The Overnight Rate is the rate set by the Bank of Canada. The Bank of Canada's Overnight rate depicts how expensive it will be for the major financial institutions in Canada to borrow money. The Prime Rate is directly dependent upon the Overnight Rate. The Banks will base their prime rates based upon this overnight rate.

How the Bank Rate cuts due to Corona Virus will affect your mortgage payments?


If you understood the definition of above 2 rates, now is the time to understand from a consumer perspective how increase or decrease in these rates will affect your monthly mortgage payments. As you are aware that there are 2 types of mortgage rates a consumer can choose from:

1. Fixed Mortgage Rate
2. Variable Mortgage Rate


If you had taken on Fixed Mortgage Rate initially, then, unfortunately, this change won't mean anything to your payments for the mortgage.

But, if you opted for Variable Mortgage Rate when you borrowed money from the Bank then your payments will also go down based upon the Prime Rate set by your Bank. Since we know that Prime Rate is directly dependent on the Overnight Bank Rate that means that this reduction in the Bank of Canada's Overnight Rate will also reduce the Bank's Prime Rate(which is not determined yet) which will directly affect the variable mortgage rate.

Variable Mortgage Rate = Prime Rate +or - (Number)

So, for example, if Prime Rate goes down by 50 points then the new Prime Rate would be 3.45%(3.95-0.50). And the new Variable Mortgage Rate could be :

Prime(3.45%) + or - (Number)

If your Variable Rate today is (Prime -1)% then the new rate would be 3.45 -1 = 2.45%

In addition to the Mortgage Rate change, this cut would also affect, credit card rates, Student Loan rates all depending upon the Bank's Prime Rate.

For now, we just have to wait and look at the Prime Rate that the banks will decide upon and accordingly the mortgage payments for borrowers who have Variable Mortgage rates will also affect.
I will keep all of you updated as soon as we get some news on the new Bank Prime Rates!

Until then,  Thank you from your local Realtor. For any of your Real Estate needs in Canada, you can contact me. I would be happy to help!

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