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Bank of Canada's cuts rate by 50 basis points. What does it mean to you as a home buyer?


What happened?

The Bank of Canada cut its policy interest rate by 50 basis points from 1.75% to 1.25%. Matching the US, due to the economic risk related to COVID-19.


What is the policy interest rate?

The policy interest rate is often known as the "overnight rate". Banks both borrow and charge each other money in order to have a reserved amount of cash funds mandated by the government of Canada. By raising and lowering this policy, the interest rate affects how major financial institutions borrow and share with each other. This chain effect then alters how the financial institutions lend money, offer investment options, mortgage rates etc. The policy is meant to contribute to the economic performance of Canada's market by keeping inflation low and stable. By keeping control of the large financial institutions, the government of Canada can directly monitor and control Canada's economy as well.


How does this policy affect you and mortgage rates?

Due to a significant cut in Canada's policy interest rate, it wouldn't be a surprise to that interest rates have already dropped a few basis points to match the rate cut.


If you currently have a mortgage, you will be affected if you have a variable interest rate, not a fixed interest rate. With variable interest rates, your rate is determined by the overnight rate. With a 50 basis point drop, you may see lower payments this month. If you have a fixed interest rate, your rate will not fluctuate at all since its based on the 5 year bond rate.


Wondering if it's a good time to buy or refinance?

This is an excellent time to look at buying or refinancing your property. The policy interest rate cut was meant to help compensate the economic loss due to the COVID-19 threat. It's meant as an incentive for home owners to invest their money, rather than to conserve it all.


If you would like to take advantage of the lower interest rates, please feel free to contact me. I would love to set up a free, no obligation consultation to see if buying or refinancing is right for you, Contact Me