The Bank of Canada cut its overnight rate for the first time in four years. This follows the US Central Bank doing the same thing just yesterday.
In the BoC announcement it seems that the overall Canadian economy has been doing sufficiently well that under normal circumstances they would not have dropped the rate. However the BoC views the threat of the Coronavirus to the international economy sufficient to warrant some stimulus to our economy by was of lower rates.
They have left the door open that they may drop again as soon as April, but that will be decided in April.
Why is the corona virus a threat? There are currently fewer than 3 dozen confirmed cases in the country. However, it is impacting the travel industry already. My community facebook group has lots of people discussing changing or cancelling their travel plans. A good friend of mine turns 40 this year and was planning a trip to Indonesia with his wife, that they have now cancelled too.
So not only is tourism internationally being impacted, also domestically from people travelling here less from other places in the world. This impacts the airline industry, oil consumption (airlines are one of the biggest consumers globally), hotels, restaurants and more.
So what does this lower rate mean to you? It will immediately drop rates on lines of credit, home equity lines of credit, and variable rate mortgages. Prime is currently sitting at 3.95% and we will see it drop by at least a quarter percent in the next few days, and possibly as much as a half percent.
Variable rate mortgages haven’t been very appealing in the last few years, and even still, they are only close to a 5-year fixed rate. However, if rates drop again, we will for the first time in a long time see variable rates lower than the fixed rates.
However, since the Coronavirus seems to be the main reason rates have dropped, once the risk is mitigated, and effective vaccines or treatments are found, we may very likely see the rates increase again.
The future is always uncertain. Fixed vs variable is part of the mortgage conversation again. My team and I are always here to chat.