The Bank of Canada surprised us all with a .25 per cent cut to their key interest rate last month. Unfortunately, the banks did not share the full discount with us.
The banks moved the prime rate from three to 2.85 per cent.
This rate cut will impact us all in different ways.
For those of you who currently have a variable rate mortgage or line of credit, both are tied to the bank’s prime lending rate, meaning you will benefit from the cut.
Your borrowing costs and monthly payment will be reduced.
This is an excellent opportunity to take advantage of the drop in your rate and make it work for you. Exercise your prepayment options and leave your monthly as it was—the extra money will be applied directly to the principal of your mortgage.
In addition to your savings on the interest reduction, you will pay off your mortgage faster.
If you are currently in a fixed rate mortgage, the movement in the rate will have no impact.
But going forward, if you are in the market for a new mortgage or have a mortgage coming up for renewal, we could see even lower fixed rate mortgages than what we are presently experiencing.
The spring market could see some very competitive fixed rate mortgage offers.
Interest costs on any credit card balances you are currently carrying will not be affected by the downward rate.
Credit card balances are fixed rates and typically do not change when there is a reduction in rates.
The reduction will not have any immediate effect on vehicle loans as they too are typically fixed.
We could see some rate reductions on vehicle loans going forward as competition heats up for this spring market.
Our Canadian dollar fell dramatically against other currencies after the announcement. What does that mean for you?
Bad news if you have plans to travel abroad in the next while as your purchasing power will be reduced.
For savers, the return on your savings accounts will go down. While the change will not be huge due to the cut in rates during the last recession, still you sadly will now be earning less.
There is incentive to invest in stocks, ETFs and mutual funds as they tend to benefit from rate cuts as businesses tend to take advantage of cheaper credit and that could improve their returns and share prices down the road.
Lower oil prices are having a negative effect on the Canadian economy and that could easily last for all of 2015 and beyond.
Interest rates and growth in Canada is expected to be sluggish for the next one to two years. Some economists are even speculating there may be another rate cut this year—as early as March.
