The Bank of Canada shocked financial markets Wednesday morning, cutting its key interest rate rather than increasing them, as has been speculated for some time. What does that mean to you?
1. Cheaper Mortgages - Buying a home just got cheaper!
If you are taking out a new mortgage, you may see some very competitive and attractive interest rates being offered. Joel Olson, Mortgage Broker for Lending Max announced on Social Media just a few hours after the Bank of Canada announcement, "We now have five year rates at 2 per cent!"
If your mortgage rate is "variable" meaning it varies as interest rates change, this is very good news for you. Your interest rates may drop. Whether or not it drops will depend on your lending institutions decisions how to apply the Bank of Canada rate to their own customer's accounts.
If your current mortgage rate is "fixed", you won't see an immediate change as these rates are linked to long-term bond yields. You may have to rate until the end of the "term" and hope the cheap rates still exist and you can shop around.
That said, consumers are advised to be aware that this is a temporary measure and rates will eventually rise. A good rule of thumb is to determine if your payments will be affordable at a higher interest rate - say 4.5 per cent. Today's rates will simply make things more affordable in the interim.
2. Cheaper Borrowing - For those holding a "Line of Credit", the good news is that interest rates tend to be tied to a bank's prime interest rate, which corresponds to the Bank of Canada's rate. Your interest payments will decrease as your lending institution adjusts their rates.
The new rates have zero impact on the interest charges on carrying balances on credit cards however, nor does it impact the rates charged for financing that new set of wheels.
But don't take on debt just because you can.
"Our debt-to-income ration, at 165 per cent, is relatively high," noted Benjamin Tal, CIBC Deputy Chief Economist speaking to the potential risk to the Canadian economy.
3. The Canadian dollar devalued - The bad news is this impacts the Canadian dollar value against the worlds currency's. I won't go into "why" here, but just understand, the Canadian dollar is in free fall. This is bad news for “snowbirds” spending their winters in warmer climates and putting greater motivation to “staycations”, keeping your hard earned money right here in Canada. And there’s no end to that devaluation any time soon notes Karl Schamotta, director of foreign exchange research at Cambridge Mercantile Group.
4. Saving vs Investing - Those with savings accounts have seen their interest earned drop to below inflation, meaning they are losing money as long as the banks have the money tucked away.
"… if you're not earning much interest before, you're going to be earning less interest now," said TD Economic’s Senior Economist. “This could be a good time for savers to think about changing their strategy,” said Bartlett.
Conversely, property and home values have remained comparatively stable. In last week’s blog we shared BC Real Estate Association’s announcement that the average provincial MLS® residential price was UP 5.8 per cent from the previous year!
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