21 Jan Bank of Canada Drops Overnight Lending Rate for First Time in 4.5 Years, what it means to home buyers.

This morning, Governor Stephen Poloz announced that the Bank of Canada (BoC) was dropping its overnight lending rate by 0.25%, from 1.00% down to 0.75%. This is the first time the interest rate has changed since September 2010 and when market was perdicting a .25 increase in first half of 2015.

This change come as a shock to everyone including myself, as you have read my post days locking the mortgage to fixed over variable. Housing across Canada will became more affordable in the second quarter of this year. Few analyst are perdicting that it will go back to one in 3 quartor so its even a better change to lock for 5 year fixed if thinking of buying a home.

What does all of this mean for home owners or mortage borrowers?

On a consumer level, your bank’s Prime rate will likely follow the overnight rate. Prime rate has been sitting at 3.00% for 4.5 years now, but you’ll likely see it drop by 0.25% down to 2.75% soon. If that’s the case, any credit you currently have open that’s attached to Prime rate (variable mortgage, line of credit, etc.) would also so its interest rate go down by 0.25% but this will not change the fixed mortgages.

Here’s an example of how the calculation goes. 

Let’s say you’re one who have variable 5 year variable rate of just 2.20% (3.00% – 0.80%) – your rate would go down to 1.95%, if Prime dropped by 0.25%. If you bought a home for $500,000, put down 20% and amortized over 30 years, your current monthly mortgage payment is $1517. If your rate dropped to 1.95%, however, your payment would go down to$1,467; that’s an extra $50 in your monthly budget and saving of $600 annually.