Bank of Canada Cuts Key Interest Rate by 50bps

The Bank of Canada announced this morning that it would cut its key policy rate by half a percentage point to its lowest level ever.

Variable mortgages offer savings Whether the lower policy rate from the Bank of Canada will translate to lower interest rates for some borrowers remains to be seen, but variable-rate mortgages are still a cheaper option than they were a year ago.

As of January 19, 2009, a competitive variable rate mortgage could be obtained at the chartered bank prime rate of 3.50 per cent plus 0.6 per cent (a rate of 4.10 per cent). In January 2008 before the credit crisis got traction, the competitive rate for a new variable rate mortgage was prime (6.00 per cent) minus 0.6 per cent (5.40 per cent). On a $200,000 mortgage with a traditional 25-year amortization, that rate differential means an advantage of $146.26 for each monthly payment, adding up to $1,755.12 in annual savings.

Fixed-rate pricing on downward trend Pricing for fixed rate mortgages is higher than it normally would be, as lenders are accounting for higher perceived risk in the financial services industry. The spread between a five-year Government of Canada Bond (1.58 per cent) and a competitive fixed rate mortgage rate (4.79 per cent) is now 3.21 per cent – which is much higher than what we have seen over the last few years.

However, the pricing trend for fixed rate mortgages has been downward lately, which is good news for consumers.

Getting the best of both worlds The good news is that many of these variable-rate mortgages have liberal conversion privileges that allow borrowers to switch to another mortgage type, and lock-in to a fixed rate mortgage when they’re ready, depending on what works best for them.

Working with an Invis mortgage professional can help you make sense of the options available and find the best mortgage for you.

“On the heels of 2008’s credit market crunch, the headlines have seemed grim, but in turbulent financial times it is important for people with mortgages, or applying for a mortgage, to understand that good options are still out there,” says Rob Hafer, regional manager with Invis. “Based on today’s rate environment and your own financial situation that may mean considering a variety of mortgage strategies before you decide.”