I hear rates are dropping, what does that mean for me?
As mortgage brokers, this the most common question we’re asked; what are rates are doing? That conversation can go several ways depending on how we think it affects you. But today, the rate drop is making buying a home and renewing a mortgage more affordable.
Bank of Canada Rate
Today (March 4th, 2020) the Bank of Canada (BoC) dropped their target overnight rate by ½%. The drop, which wasn’t anticipated until the past couple of weeks, is due to the underperforming economy of Canada, even further weakened by how the markets are reacting to the COVID-19 virus.
When the BoC lowers this rate, generally the major banks follow by lowering their prime rate. The prime rate is the starting point for several products lenders offer such as loans, lines of credit, and variable rate type mortgages. How we see it, the rate drop here is a good thing if you’ve got any of those types of products.
The question as of today is whether the banks will drop their prime rate to the full ½% as well. That was always the norm, however, over the past few years, the banks have been known to not follow the full amount necessary and keep the difference in their pockets. Hard to believe the banks would do that, right?
Bond yields can affect your mortgage and other investments but are a little trickier to explain. The changes in bond yields can be a good thing, a bad thing, or both!
If you have a mortgage up for renewal or are thinking of doing a refinance or early renewal, then bond yields going down are going to directly affect fixed-term mortgage rates. We’ve seen 5- and 10-year bond yields dropping over the past couple weeks, and in turn, our major lenders are starting to offer even lower interest rates on fixed-term mortgages right now. This is a good thing.
On the flip side, if you have a lot of your investment portfolio dedicated to products tied to bonds and other fixed interest type vehicles, your return is going to diminish in this environment of declining bond yields. With investors unsure of the Canadian and global economy, they often turn to safer investments. The demand for bonds, Guaranteed Investment Certificates (GICs), etc. goes up which means they do not have to offer as high a return to sell them. (And you thought that whole idea of supply and demand in high school economics was never going to be useful in the real world.)
Make a Pro/Con List With Your Broker
Like most things in life, there are pros and cons to this changing rate environment we’re experiencing. Borrowing money on most fronts is becoming less expensive, but that’s offset by the fact your investments are probably not posting the gains they were in better economic times.
We’re just scratching the surface of the complexity of how interest is determined in our market. But, the best way to know how these rates are going to affect you is to get the guidance of financial planners or a professional mortgage broker.