Interest Rate made Interesting

Bank of Canada (BoC) dropped its interest rate on 21 January by 25 basis points (0.25%). What does that mean in simple terms? Even before that, what is this interest rate?

  1. Prime rate or ’Target for the overnight rate’ as it is properly called, or ‘V39079’ on the Bank of Canada website is effectively a monetary policy. Bank of Canada uses this rate to influence other interest rates by raising and lowering the target for the overnight rate.
  2. The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or "overnight") funds among themselves. Changes in the target for the overnight rate influence other interest rates, such as those for consumer loans and mortgages. They can also affect the exchange rate of the Canadian dollar.
  3. BoC makes these interest rate announcements on 8 set dates. For 2015, these dates are 21 January, 4 March, 15 April, 27 May, 15 July, 9 September, 21 October and 2 December. So now you can look forward to the next announcement.
Why was the interest rate cut? Well, for that watch Bank of Canada’s Governor Stephen Poloz’s news conference explaining the details on why BoC chose to make its move on the prime rate. 
Ways that BoC Interest Rate affects us

Mortgages
: Interest rates that you pay on your mortgages could fall. They don’t always fall due to several reasons, one of them which is that the institution lending you money doesn’t want to lend at a rate any cheaper. That’s why you shop around to find a cheaper rate. Holders of fixed-rate mortgages, of course, won't enjoy a cut in monthly payments. Fixed-rate mortgages give you the security of set payments. Variable rate mortgages and new mortgages may see a rate drop.

Line of Credits and Credit Cards
: Canadians hoping for a break on their credit card bills are out 

of luck. Your credit card interest rate is actually a stated amount and doesn’t change with BoC’s prime rate. Interest rates for lines of credit are generally tied to a bank's prime interest rate, which is usually tied to the Bank of Canada's overnight rate. That means Canadians borrowing money 
through a line of credit may see their borrowing costs to come down, depending on whether their bank cuts its prime interest rate.

Dollar Drops
: With an interest rate reduction, the dollar drops. That means Canadians immediately have less purchasing power abroad. That's bad news for snowbirds with homes in the U.S. or anyone planning to travel outside of Canada. The interest rates and the lower oil prices will have a negative effect on the Canadian economy.

Saving with Your Bank
: If you enjoy interest generated from a traditional savings account or any through other bank products, the BoC interest rate drop is bad news. You were not earning much interest before, you're going to be earning lesser interest now. This could be a good time for savers to think about changing their strategy.

Real Estate
: This is one industry that gains from interest rate cuts. If you don’t own anything, immediately start talking to a REALTOR about buying real estate. If you own a home or even a home and an investment property, think about adding another to your portfolio. And don’t worry it is not as hard as it may seem. I have helped people buy real estate with as little as $15,000. All you have to do is pick up the phone and call. If you choose to call me, remember to ask me about Favourable Leveraging and how it will help you; not can help your or may help you, but will help you.


Formally educated as an Architect, Jagdeep Singh is Toronto REALTOR™ consulting on both resale real estate and new developments. Powerful Local Focus on Real Estate with a Global Perspective™. This post is for information purposes only. Though effort has been made to ensure the accuracy of the contents, the reader is advised to verify the information independently. This post may contain contain information that is privileged, confidential and exempt from disclosure under applicable law. The reader is not allowed to reproduce it in any medium without the author’s prior written permission. Jagdeep Singh is a broker with Century 21 Heritage Group Ltd., brokerage (416) 798-7133 which is independently owned and operated. This message is not intended to solicit parties currently under contract.

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Jagdeep Singh

Jagdeep Singh

Real Estate Broker
CENTURY 21 Heritage Group Ltd., Brokerage*
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