After six-in-a-row announcements to hold on rates, the Bank of Canada’s rate has now lowered by a quarter-percentage point and is now at 4.75 per cent.
Homeowners with variable-rate mortgages, and Canadians holding other types of debt linked to the central bank’s policy rate, could be the first to experience a reduction in their interest rates. However, the full impact of this change will need some time to unfold for fixed lender rates.
A 25 basis point reduction in interest rates translates to a 0.25% decrease. The savings on a mortgage due to this reduction can be calculated by considering the principal amount, the original interest rate, the term of the mortgage, and the payment frequency.
Here’s an example to illustrate the savings:
Mortgage principal: $300,000
Original interest rate: 3.5%
New interest rate: 3.25% (after 25 basis point reduction)
Mortgage term: 25 years
Original monthly payment: $1,501.87
New monthly payment: $1,461.95
Monthly savings: $39.92
Total savings over the life of the mortgage (25 years): $11,976.61
So, with a 25 basis point reduction in the interest rate, you would save approximately $39.92 per month and about $11,976.61 over the entire term of a 25-year mortgage with a principal of $300,000.
The Bank of Canada’s rate decisions do not always directly influence a fixed mortgage rate. For the most part, the bond market influences the fixed mortgage rate. As bond rates change, lenders then begin to adjust their fixed rates. This is a wait-and-see situation right now for the effect on mortgages.