29 Jan All major canadian banks finally cut their prime lending rate to 2.85

Canada’s biggest banks are lowering their prime lending rates, nearly a week after a surprise rate cut by the Bank of Canada.  Royal Bank of Canada said Tuesday it decreased its prime lending rate to 2.85 per cent from 3 per cent. The move was quickly matched by the Bank of Montreal, TD Canada Trust, CIBC and Scotiabank. The rate changes take effect on Wednesday.

We reported on Jan 21st that the Bank of Canada (BoC) was dropping its overnight lending rate by 0.25%, from 1.00% down to 0.75%. This was the first time the interest rate has changed since September 2010 and when market was predicting 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 predicting that it will go back to one in 3 quarter 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 mortgage 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 mortgage rates.

Here’s an example of how the calculation goes.

Let’s say you’re one who have variable 5 year variable  mortgage 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.