Another Emergency Rate Cut!

March 28, 2020

 

 

Bank of Canada has decreased their overnight rate by 0.50%, bringing it to 0.25%.

Which for most lenders will likely decrease their Prime rate to 2.45% from the previous 2.95%.

 

This change will have an impact on those with a Variable Rate Mortgage or Home Equity Line of Credit. It will mean a $26 a month payment decrease for every $100,000.

 

 

Mr. Poloz made it clear that the bank has no intention of cutting its rate further, and rejected the idea of negative interest rates similar to those at the European Central Bank.

 

The Bank will provide a full update of its outlook for the Canadian and global economies on April 15. 

The Bank of Canada

 

 

 

What does this mean for homebuyers?

Those with a current Variable Rate will be reaping the benefits of these rate decreases.

But those of you who are looking to buy a house right now, you may be confused by the increase in lenders rates. In short, because there are some home owners who are deferring their mortgage payments due to layoffs and others who may be defaulting on their payments, the bank is losing money. So they are increasing rates to recapture some of these funds and increase their liquidity.

 

 

“I think if you’re a bank, you’re scared of losses right now,” Shawn Stillman, founder of mortgageoutlet.ca, told CMT. “The banks are in this to make money, and if they don’t think that they’re going to be able to make money because all of a sudden their default rate is going to go up, then they’re going to protect themselves by raising rates.”

 

In addition to the potential for an increase in default rates, Stillman says that with more people facing temporary layoffs due to the coronavirus, more people will start drawing on their available credit.

 

“If you’re a business and you have a line of credit, you’re drawing on that line of credit. If you have credit cards, you’re maxing out those credit cards. You are using your ability to borrow more money and it becomes a shock to the system,” Stillman said.  Essentially the banks could face a growing run on available credit facilities, which could challenge their ability to finance all of that credit.

 

Knowing this, banks are starting to increase the discounts from prime so that the economics of funding variable-rate mortgages continues to make sense.

 

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