The impacts of a reduced lending rate

On Wednesday, July 15th, the Bank of Canada cut the overnight lending rate by 0.25%.

How does that affect you?

If you are in a fixed-rate mortgage it has no impact at all. If you have other higher interest debt such as credit card or car loans, again it has no impact.

If you are one of the 12.5% of mortgage holders in a variable rate mortgage you did a mostly-happy-dance when the lender passed on a 0.15% rate cut to holders of variable rate mortgages and secured lines of credit.

Only mostly happy as you asked, “Where did the other 0.10% go?”

This is the second 0.25% rate drop this year, and the second time the mortgage lenders have retained 0.10% of that drop. Lenders are increasing their profit margins on the variable rate product, and there is little that borrowers can do about this.

The big question is whether or not the same metrics will apply when it comes time for rates to rise, which may well be some time off into the future. Will the next 0.25% rate increase result in just a 0.15% lender increase, or will lenders hit borrowers with the full increase?

Only time will tell. The fine print of mortgage documents gives this power to the lenders, as variable rate mortgages are granted at ‘lender prime’ not the Bank of Canada prime.

What about the impact of low rates on the housing market?

Again there appears, thus far, to be little impact on fixed rates, and the qualifying rate used to obtain a variable rate mortgage remains at 4.64%. In other words, the rate cut has not directly translated into greater borrowing power for consumers at all. Thus, it should do little to push prices any higher in the already hot markets.

As always, if you have additional questions on this topic, or general mortgage questions, I’m here to help!

Jean-Guy Turcotte is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group

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