Last week, the Bank of Canada (BoC) cut its prime overnight rate from 1.75% to 1.25%, making this the largest unscheduled rate drop since the 2008 recession. With spring just around the corner, many of us are contemplating the impact this rate drop will have for Canadians and the housing market.

Why did the BoC cut rates?

Following the lead of the U.S. Federal Reserve, the BoC cut rates due to the spread of COVID-19 or “coronavirus,” which has had many negative effects on the economy worldwide. In an effort to protect the Canadian economy from further effects, the BoC lowered its prime overnight rate by 50 basis points.

What does it mean for Canadians?

After the Bank of Canada cut its rate, many Canadian lenders also lowered their prime rates, which led to lower rates for fixed and variable mortgages. Lower mortgage rates mean lower monthly mortgage payments for Canadians, which improves the overall outlook for housing affordability in Canada. As we head into the spring, we can also expect a boost in sales activity and more people switching and refinancing their mortgages due to these lower rates. Together with the new mortgage stress test rules coming into effect on April 6, the spring housing market is likely to heat up.

Who benefits in the short term?

With lower mortgage rates and lower monthly payments, the prospect of home ownership becomes more affordable for Canadians. That said, we expect this drop in rates to stimulate buying activity in the Canadian real estate market. With more people in the market to buy, sellers will also benefit as this will increase the chances of bidding wars and selling their homes for top dollar. Homeowners looking to refinance or switch their mortgage will also stand to benefit. With these low rates, mortgages should definitely look into the potential cost savings of switching and/or refinancing.

What does it mean for variable rates?

The recent rate drop from the BoC caused a 0.5% drop in variable-rate mortgages. For individuals with variable-rate mortgages, this drop will result in large savings on their interest payments and enable them to pay off more principal on their mortgage. However, it’s also important to note that rates were dropped to stimulate the economy, so they could shift back upwards at any time based on policy changes, or if some of the banks decide to increase their splits (we already see this trend).

What does it mean for fixed rates?

While fixed rates aren’t directly affected by the BoC’s rate cut, there is often a correlated drop. Luckily, for fixed-rate seekers, rates have dropped further this past week – hitting near record lows. This is a great time to shop for a fixed-rate mortgage or refinance/switch an existing mortgage. Even for variable-rate buyers, there has rarely been a better time to be in a fixed-rate mortgage.

How to learn more

To learn more about how you can benefit from the recent drop in mortgage rates, simply apply online with Homewise today and one of our Mortgage Advisors will get in touch and answer any questions you may have.