What does the Bank of Canada’s rate cut mean for the mortgages, credit lines and real estate markets?

The Bank of Canada today cut its key interest rate by a quarter percentage point to 4.75 percent for the first time in four years.

Here’s what this could mean for your finances and the real estate market.

What does this mean for consumers?

The Bank of Canada’s key interest rate affects banks’ borrowing costs, meaning they can, but are not required to, lower their own Prime lending rates.

Banks tend to raise the Prime rate very quickly at the same time as the Bank of Canada increases. They were less consistent on the way down. But when the central bank last cut rates four years ago, banks followed suit throughout the same day.

Canadian banks also have more flexibility in cutting decisions than before. Banks choose how much interest they add to the Bank of Canada rate, and that buffer has increased over the last couple of decades.

What does this mean for your mortgage?

If banks cut their Prime rate, it would have an immediate impact on borrowers with variable/adjustable rate mortgages in the same way they felt the brunt of rate increases.

Those with a fixed-rate mortgage won’t see their payments change until it’s time to renew their loans.

Fixed mortgage rates are determined by what happens in the bond market, which, while dependent on the Bank of Canada’s rate decisions, is based on overall investor confidence. The market has already largely priced in the rate cuts.

How much mortgage savings can you expect from today’s rate cut?

A quarter-percentage point reduction won’t make a big difference to your monthly mortgage payments. The savings would be just under $15 per month for every $100,000 of the mortgage balance. So someone with a $500,000 mortgage, 25-year amortization and a 6% rate before the cut would save about $74 a month if the rate dropped to 5.75%.

What does this mean for lines of credit and credit cards?

Lines of credit are typically tied to bank prime rates, so borrowers should see some immediate savings if banks cut their Prime rates.

Credit card rates are more fixed, so consumers shouldn’t expect much change anytime soon.

Impact on the real estate market

Real estate analysts say the Bank of Canada’s long-awaited decision to cut its key interest rate could signal what many would-be home buyers have been waiting for – to take the plunge and re-enter the market to buy.

Of course, there is pent-up demand. Among those waiting, just over half said they would resume their search if interest rates fell, including one in 10 who said a cut of just 25 basis points would be enough to get them back into the market.

Typically, when rates go down, prices go up. So this may be the time when people get back into the game, knowing and anticipating that prices are likely to rise again.