What just happened
- The Bank of Canada has cut its key policy interest rate by 25 basis points, bringing it down to 2.50%.
- This is the first cut in six months. The Bank of Canada did this because the job market is softening, inflation pressures are easing, and the economy is showing signs of slowing.
- The best 5 year variable currently stands at around 3.64% for high ratio purchases(less than 20% down-payment), which could drop to 3.39% if there is another rate cut in October.
- Employment: The August data was released, and we saw unemployment at 7.1%, with job losses showing growing cracks in our economy.
- U.S. Pressure: The Federal Reserve is expected to start its own cutting cycle later today, putting massive pressure on the Bank of Canada to match.
- Inflation: Core inflation barely budged, remaining around 3%, still too high in normal times, but a slight dip plus a small month-to-month CPI contraction (-0.1%) gave cover for today’s move.
The prime rate: what it is, and what it is now
- The prime rate is the rate banks use as a base for many of their variable-rate products (variable mortgages, lines of credit, etc.). Changes in the BoC’s overnight or policy rate tend to influence prime, though banks add margins.
- As of now, major banks’ prime rate is 4.95%, but this will change to 4.70% after todays announcement.
- Markets expect another rate cut this year by 0.25%, which should have variable rates sitting around 3.39% in some cases.
What does this mean for fixed vs variable mortgage rates?
Short answer: variable rates will be effected by the rate cuts, but fixed rates will not see any changes unless bond yields drop. Fixed rates primarily move based off of the bond market, which can go up and down at any time. As the bond market already priced in this rate cut, we wont see any changes on fixed rates as the bond market was already expecting this decrease.
| Feature | Variable-rate mortgages | Fixed-rate mortgages |
|---|---|---|
| How tied are they to BoC / prime rate? | When BoC rate drops, prime rate drops. This will lower variable mortgage rates, | Fixed rates are heavily influenced by bond yields, inflation expectations, and what investors expect rates to do. Even if BoC cuts policy rate, fixed rates will not drop. |
| Payment predictability | Payments can move up or down if rates change; more risk. But when rates are cut for the prime rate, your variable payment will go down if you have an ‘adjustable’ variable mortgage. If you do not have an adjustable variable rate then more of your payments go towards principal vs interest. | Payments stay the same over the fixed‐term you locked in. |
| Timing of benefits from rate cut | As soon as prime is adjusted, your variable rate should drop within the next month. | No changes |
| When this cut helps most | If you’re on a variable rate or about to renew a variable portion, or if you are trying to buy a home, in some cases it may increase purchasing power. | If fixed-rate offers fall and look attractive compared to variable, or if you want certainty. |
Key Takeaways
Here are some practical tips given the new rate cut:
- If you’re on a variable rate mortgage, check what your margin is (prime-plus or minus). This cut should help you immediately or in coming weeks, but how much savings depends on your spread.
- If you have an adjustable rate variable mortgage, your payments will decrease. If you have a capped variable rate mortgage, your payment amount wont change, but more of the amount will go towards principal vs interest.
- Fixed rates will not change based off the recent 0.25% drop. They react heavily to the bond market, which can go up and down at any time.
- Keep in mind that while a 5 year variable may sound enticing, one should question if they are ok with riding out any fluctuations, should they happen, over the next 5 years. There is no certainty as to where rates will be in 2-4 years.
- Unexpected things (e.g. inflation or employment) could push rates back up, so make sure you can handle some wiggle room if you take on a variable rate.
- One more 0.25% cut is expected for 2026.
