The Bank of Canada has shocked the market by cutting the overnight rate by 25bps to 0.75%. This puts the prime lending rate in Canada down to 2.75%. The BofC commented the rate cut was due to the economic threat of the drop in oil prices.
What this means to you:
For those of you in a variable rate mortgage or a line of credit you will see a reduced interest rate of .25%. Prime rate in Canada has been at 3% since September of 2010. On a variable mortgage or line of credit, this will equate to an interest savings of $250 per year for every $100,000. For those in a fixed rate mortgage, this announcement does not affect you whatsoever. However, the bond yields in Canada are directly correlated to fixed mortgage rates and late last week the 5 Year bond yield in Canada broke the all-time low. With very little upward pressure we could and should see the 5 year fixed rates drop even further than the record lows they’re at right now.
Should you do anything at this time?
The answer to this question will greatly depend on your own life circumstance and your short and long term goals. There is a real opportunity right now to pay down as much debt as possible as quickly as possible. I’m being asked a lot “should I borrow more money to invest.” My personal opinion is unless you have specific investments you’re very comfortable with, or better yet, your own business to invest in then I would focus on debt repayment. When the economy does pick up and rates do move upward then you are in a great financial position to take advantage of better savings rates, RRSP’s, investments.
Will there be any additional regulations or guideline tightening?
My personal opinion is that there will not be this year. With all the different things going on (rates low, real estate overvalued, etc) I would typically say yes but it is an election year. Looking back historically, very little change happens in election year and I think this year will be similar. With a lot of struggle in Alberta and other areas of our country tied to