Anxiety or apathy: what does BoC rate cut mean for you?

The Bank of Canada (BoC) announced on July 15 that it would cut the target for the overnight lending rate from 0.75 per cent to 0.50 per cent. This was just the second such rate cut since 2010, with the BoC most recently cutting rates from one per cent to 0.75 per cent margin in January.

January’s rate cut came as a surprise, but this most recent move had been anticipated in the weeks leading up to the announcement. Lower oil prices have led the Canadian economy into a slump, prompting debates over whether we are in a recession. That argument has mostly come down to the definition of the word – a recession is technically defined as two consecutive quarters of negative GDP growth. The BoC was careful not to use the R word in its announcement, but acknowledged the economy is under-performing and an interest rate cut was necessary to “help return the economy to full capacity and inflation sustainably to target.”

The rate cut has mixed effects, however. Last month, BoC Governor Stephen Poloz compared January’s rate cut to “life-saving surgery,” noting that the positive benefits outweighed any side effects such as increased levels of consumer debt. Since mortgage rates are closely tied to the BoC’s overnight rate, the housing market will also be affected. In Toronto and Vancouver where prices have been skyrocketing, a rate cut may only make the situation worse, putting ownership further out of reach for first-time homebuyers.

Prior to the announcement, it was unclear what a rate cut would mean for an already overstimulated housing market. But in the hours following the announcement, it became clear that homebuyers were eager to take advantage of lower mortgage rates. Traffic to ratehub.ca surged 300 per cent as Canadians searched for better mortgage deals in the hours following the announcement. Mortgage brokerage Butler Mortgage lowered its five-year variable mortgage rate by 0.10 per cent almost immediately, to 1.88 from 1.99 per cent. The drop translates to $1,320 savings in mortgage payments over a five-year term.

TD was the first of the major banks to lower their prime rate, cutting it by 0.10 per cent the day as the BoC announcement. Within a day, many banks had lowered their prime rate by to 2.70 per cent.

Some remain unconvinced the cut will do enough for the average Canadian to save any money, or to stimulate the economy. Others worry the impact on the Toronto and Vancouver housing markets would increase disparity between those hot markets and the rest of the country, where real estate has been relatively stable.

So what does BoC’s latest announcement mean for you? If you have a variable rate mortgage, you can expect to save a few dollars a month when your interest rate drops. Interest rates on other variable rate loans (such as lines of credit) are also likely to drop, freeing up some cash. If you’re shopping for a house, your overall affordability will likely increase due to lower mortgage rates, but you may find that higher house prices quickly negate any advantage you might have had.

We’ll have the summer to find out what effect the cut has on the housing market and the economy as a whole. The next rate announcement is Sept. 9.

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