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Prime rate drops, how does this affect your variable rate mortgage?
As you know, your variable rate mortgage, line of credit and/or student loans are all based on the Prime Rate and here is your personal update from me on the recent Bank of Canada announcement on changes to their Overnight Rate which in most cases impacts your Prime Rate.
At 10:00 am EST, Wednesday March 4, 2020, the Bank of Canada dropped their overnight rate by 0.50% – we do need to wait to see if all lenders match the same drop on your prime rate because they haven’t always matched it completely in the past. You’ll be informed directly by your lender shortly on not only the confirmed drop but your new payments. This is great news for you to go into the spring with confidence that you continue to save even more unnecessary interest.
Things have been busy since the last announcement and here are some highlights:
Stress Test Changes: Effective April 6, 2020 for all insured mortgages (less than 20% down payment), the rate used to qualify borrowers will now be the greater of the borrowers’ contract rate or the weekly median five-year fixed rate plus 2%. For some this will have a small impact but for others it could be the stepping stone to purchasing a home or considering moving up! Share this with anyone thinking of getting into the market!
Rates Coming Down: With the global concerns not only on the coronavirus but the weakened US economy the bond market has dropped as investors look for more secure investments. This drop in the bond market yield typically follows fixed term rate drops and today we also saw the variables drops. This is great news if you are thinking of making a change that impacts your mortgage and it also means the lower qualifying rate with the stress test changes. Maybe it’s a great time for a debt consolidation to save you unnecessary interest.
Consumer Confidence & Toilet Paper: Despite the above, consumer confidence might be ebbing lower as people are worried about the coronavirus. Whether you are looking for a bigger place to stash all that toilet paper or considering buying an investment property, let’s chat about opportunities and how we can help!
To continue with the Bank of Canada news, here is an excerpt of the announcement and what they had to say about the current market conditions:
“While Canada’s economy has been operating close to potential with inflation on target, the COVID-19 virus is a material negative shock to the Canadian and global outlooks, and monetary and fiscal authorities are responding. Before the outbreak, the global economy was showing signs of stabilizing, as projected. However, COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted. This has pulled down commodity prices and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.
It is becoming clear that the first quarter of 2020 will be weaker than the Bank had expected. The drop in Canada’s terms of trade, if sustained, will weigh on income growth. Meanwhile, business investment does not appear to be recovering as was expected following positive trade policy developments. In addition, rail line blockades, strikes by Ontario teachers, and winter storms in some regions are dampening economic activity in the first quarter.”
Weighing all of these factors, the outlook is clearly weaker now and as the situation evolves, the Bank “stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target. While markets continue to function well, the Bank will continue to ensure that the Canadian financial system has sufficient liquidity.”
Fixed rates are down and will continue to likely drop with them today being around 2.59% to 2.99% for a five-year fixed term.
Based on the anticipation that the prime rate will still remain low and maybe go even lower, I’d recommend that you remain where you are except if your current variable rate mortgage is higher than a fixed term. Call me so I can calculate what your new payment would look like and also if it is suitable for you.
I wonder if I can ask a favour: with all this uncertainty in the market having a mortgage and finance specialist on your side is even more important; if you hear a friend or family member talk about concerns with finances or the real estate market, suggest they give me a call – let me separate fact from fiction and see how I can help.
I’ll be in touch again for the next announcement on April 15th, 2020.