As expected, the Bank of Canada announced that they are cutting their overnight rate by another 0.50% this morning. As the standard movement is 0.25%, anything greater is considered an oversized move.  Just weeks ago, it seemed like a smaller 0.25% cut was on the horizon. However, given higher unemployment data released on Friday, it gave the Bank of Canada the confidence to move forward with the double cut. Until then, it was a coin toss.

 

How the Cut Affects Variable Rate Mortgages 

As mortgage lenders set their prime rates based on the BoC overnight rate, they are expected to adjust it accordingly within days.  While it’s not guaranteed they’ll match the full cut, any deviation would be shocking.  They almost always match the cut. 

Keyword: almost.  

Back in 2015, the Bank of Canada cut their rate twice in the first six months of the year, with each cut being for the standard 0.25%. However, mortgage lenders, led by TD Bank, reduced their prime rates by 0.15% on each cut. This is extremely rare, but it indicates that it’s possible… just not probable.

Fortunately, it’s expected that the banks will adjust their prime rates to match the cut… as always, meaning that all variable rate mortgages will drop by 0.50%. 

 

For Those Currently in a Variable rate Mortgage

There are two types of variable rate mortgages: 

  • Adjustable rate 
  • True variable rate 

Adjustable-rate mortgage (ARM) 

With an ARM, your payment will change with prime rate. As it has now dropped, those with an adjustable rate can expect their payment to drop by roughly $28 for every $100,000 owed. If you owe $500,000 on your mortgage, then that’s a respectable $140 drop to your mortgage payment. 

 

True variable rate mortgage (VRM)

For those in a true variable rate mortgage, where the payment remains the same for the term, a much larger portion of your payment will now be applied to principal, while paying the corresponding amount in less interest. This reduces the effective amortization on your mortgage, bringing you all that much closer to mortgage freedom. 

 

Will Fixed Rates Also Drop?

Whenever there is a cut from the Bank of Canada, we get flooded with emails and calls from our clients asking if fixed rates will also drop by 0.50%. 

The quick answer is no. 

But fixed mortgage rates are primarily influenced by bond yields, not the BoC’s rate.

On December 11th, the same day of the BoC’s cut, the U.S. inflation report revealed slightly higher November inflation, causing bond yields to spike by close to 2.00% despite the BoC’s rate cut. While yields have dropped roughly 16% since their November peak, most lenders have yet to come through with any notable drops to fixed rates.

Why the disconnect? 

Fixed mortgage rate pricing depends on more than bond yields. Factors like credit swaps, market volatility, and real (or perceived) risks, and other costs involved with sourcing funds can also play a role. 

That said, if the bond yields were to continue to fall, then fixed mortgage rates would eventually have to crack under the pressure… and fall accordingly. 

 

More Cuts Coming?

The overnight rate has now dropped by 1.75% since the Bank of Canada began cutting their rate on June 5th. Another 1.00% to 1.25% in additional cuts are expected in 2025, according to what five of the big six banks have been forecasting. I posted their recent forecasts in last week’s blog on Where are Mortgage Rates Heading Over the Next Two Years. 

The next scheduled rate announcement from the Bank of Canada is expected on January 29th when another rate cut is possible (but not guaranteed). 

Here’s an interesting excerpt from the December 11th rate announcement:

“Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time. Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook”. 

They are no longer hinting at further rate cuts. This doesn’t mean that the rates won’t drop further, but the Bank of Canada is not making any promises. As per the quote above, their “decisions will be guided by incoming information…”.  I’m always saying that forecasts are based the information available today. But as new information becomes available, the forecasts will be adjusted accordingly. 

 

Final Thoughts 

Rate cuts are always exciting, especially when there are more expected. But keep in mind that there are never any guarantees in the financial world. What is expected doesn’t always happen. Forecasts are always changing, which can be for the better or for the worse. While things have been looking promising, there is no guarantee that the rate cuts in 2025 will be what’s forecasted. There is no guarantee that we’ll see any cuts at all. While this isn’t what’s expected, circumstances can always change. The forecasts could be accurate. But then again, they may not be. Time will tell and anything can happen. 

You can read the full announcement from the Bank of Canada here.