Some believe that the Toronto housing market will see a slowdown in activity with the impact of the COVID-19 pandemic. That being said, the Bank of Canada has been taking considerable measures to withstand the disruptions in the financial markets and economy. Bank of Canada made an announcement yesterday that the overnight rate was cut to 50 basis points or 0.25%. What exactly does this mean for mortgages?
The overnight rate is what the Bank of Canada charges other financial institutions on funds that are exchanged as well as establishes a guide for chartered banks to set their prime lending rate. The variable mortgage rates are directly impacted by the overnight rate because they move up and down with the prime rate. Conversely, fixed mortgages rely on the bond market, and are therefore indirectly affected by the overnight rate. Interest rates for the bond market move when traders believe that the central bank will either increase or decrease the interest rates.
Chartered banks have followed suit and have cut their prime rates, where RBC, TD, BMO and CIBC announced dropping their prime rate to 2.45%. It should be noted however that banks are also reducing their discounts on prime. According to BNN Bloomberg’s Doug Alexander, the Canadian mortgage rates are in fact creeping up despite the Bank of Canada making a third cut to the overnight rate. Alexander explains that the reason for this is because banks have been phasing out discounts off prime on variable mortgages (due to liquidity concerns). So, although the prime rate has dropped, the deals that banks were offering with discounts off prime have shrunk. The fixed mortgage rates are also creeping up as well.