Yes, interest rates are lower, but not for everyone.

If you’re taking the time to read this, you likely already know that today the Bank of Canada dropped its key interest rate 25 basis points, bringing the benchmark rate to 2.75%. Today’s announcement was the second announcement of the year, and the seventh consecutive rate cut.

Nothing more attention grabbing than a rate drop headline, however, some have been disappointed today to find out that this drop does not benefit them. After several phone calls and emails today, I figured it would be a good idea to get some more information out there for borrowers.

The short story

If you are currently in a fixed-rate mortgage, this rate decision will not affect your mortgage.

If you are currently in a variable-rate mortgage, you’ll see a bit more of your mortgage payments going towards principal and less towards interest.

On average, you’ll see about a $14-15 savings in interest per $100,000 borrowed.

You’ll also see savings on any variable-rate credit lines, secured and unsecured lines of credit.

The long story

Where do we begin? 

Fixed vs. Variable

When you mortgage a home, you have the choice of signing for a fixed or variable rate. Why would you choose one over the other? Here’s a little break down of each:

Fixed

Variable*

Mortgage payment remains the same throughout the entirety of your mortgage term, regardless of term length Any fluctuations in the prime rate will not change how much of your payment is going to principal and how much is going to interest. Stability in knowing exactly how much you will owe at the end of your term/when it’s time to renew your mortgage.

Historically, a variable mortgage typically has a lower interest rate than a fixed rate (although, that wasn’t the case the last couple of years, we are back there now). Any fluctuations in the prime rate will change how much of your payment goes to principal and how much goes to interest. If variable rates rise high enough that your payment is no longer covering the interest costs on your mortgage, your lender may increase your mortgage payment or extend your amortization.

*Variable rate mortgages can be static (payment stays the same through rate fluctuations, however the portion going to principal and interest changes) or adjustable (payment changes with interest rate fluctuations).

How do I know whether I should choose a fixed- or variable-rate?

Do you like to know exactly how much you’ll be paying towards your mortgage every month? Are you comfortable with perhaps a slightly higher interest rate but much less risk? Do you want to know exactly how much you’ll have left owing on your mortgage at the end of your term? If yes, then a fixed-rate mortgage might be the way to go for you.

If you’re not too worried about cash flow should the prime rate rise, and you have some wiggle room to put extra funds on your mortgage if/when needed, then a variable-rate mortgage may be worth the risk.

Ultimately, it comes down to your comfort level with risk.

Personally, I’ve done fixed in the past and in going that route, although I paid more in interest than my variable-rate mortgage holder friends for the majority of the time, I was absolutely relieved (and protected) when prime rate rose post-covid. I also renewed my mortgage while rates were on the rise, and although my rate was just shy of doubling, I still ended up saving money in interest going that route.

That said, at my last renewal, I chose to go the variable route, but I will continue to monitor the market, and if I start to feel uneasy with the risk, I’ll convert to a fixed rate mortgage.

What leads to fluctuations in the prime rate?

The Bank of Canada announces changes to the benchmark interest rate eight times per year.

Rate decisions are based on inflation, which fluctuates based on economic growth, and gross domestic product (GDP; a monetary measure of the market value of goods and services produced and rendered during a specific time period), global issues (hello covid! wars, etc.), etc.

The banks target inflation rate is 2%. When our economy is struggling to grow, it can bring inflation down below 2%. The Bank of Canada, in response, may lower the policy rate. When they lower the policy rate, it lowers interest rates across the economy as well. When this happens, people and businesses end up paying lower interest on loans and mortgages. If people are paying less in interest, they tend to spend more on other things, hence, boosting the economy.

This is the same process used – but in reverse – when inflation is up. The bank can raise the policy rate, leading to people spending less as borrowing becomes more expensive. This leads to lower demands in goods and services, slowing the economy back down, and in turn, bringing inflation back down.

What leads to fluctuations in fixed rates?

Fixed rates follow the Canadian bond yields. If yields go up, rates tend to jump up, if yields go down, rates tend to parachute down. If you’re interested in where current 5-year fixed rates will go, tracking the 5-year bond yield will give you some insight. This won’t tell you exactly when rates will go up and down, however, if bond yields are trending up, and continue to rise, you can expect banks to follow suit with their fixed rates.

However, once you’ve signed your fixed-term agreement with your lender, you don’t need to worry about rates rising or falling until it’s time to renew or refinance. You’ll have your set payment for the entirety of your term.

Next rate announcement

Stay tuned for the next Bank of Canada interest rate decision, coming up on Wednesday, April 16, 2025, and as always, reach out if you have any questions, or just want to chat mortgages.

Nadia

#bankofcanada #interestrates #lowestinterestrates #inflation #tradewar #bestinterestrates