Understanding the Prime Rate

The Impact of the Decrease in the Policy Rate on Your Mortgage Loans

With the Bank of Canada's recent decision to cut the policy rate, many Canadians are wondering what impact this could have on their mortgage rates, particularly variable and fixed rates.

Understanding the Prime Rate

The prime rate serves as a reference for many credit products, including variable-rate mortgages. When the Bank of Canada adjusts the policy rate, financial institutions often readjust their prime rate accordingly. Thus, a decrease in the policy rate often leads to a decline in the prime rate.

Impact on Variable Rates

Variable-rate mortgages are directly influenced by changes in the prime rate. With the decline in the policy rate, expect a corresponding drop in variable rates. This could translate into lower monthly payments for those with a variable-rate mortgage, helping you save on interest.

Impact on Fixed Rates

Unlike variable rates, the fixed rates do not change immediately with the prime rate. However, general interest-rate trends can influence the terms offered at the renewal of your mortgage. Fixed rates depend more on bond yields and long-term economic forecasts, but a sustained decline in the policy rate could, in time, put downward pressure on fixed rates.

Should You Renew Now?

If your renewal period is approaching, it is crucial to weigh your options. Variable-rate borrowers could benefit immediately from the rate cut. For a fixed-rate loan, it may be prudent to quickly consult your broker or financial advisor to assess whether current and future conditions align with your long-term financial goals.

In conclusion, stay informed of announcements from the Bank of Canada and their potential consequences on the prime rate to make informed decisions about your finances.