What Does The Reduction In Bank Of Canada’s Interest Rate Mean For Canadians?

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Last week, in response to the recent sharp drop in oil prices, The Bank of Canada announced that its interest rate would be dropping to 0.75% – significant considering it’s the second lowest it’s been in the past two decades. It was definitely a surprising move, especially as economists had previously forecasted an increase.

So what exactly does this all mean for Canadians? It could mean lower mortgage rates, which would be particularly exciting for homeowners, and those considering making a purchase. Variable-rate mortgages are determined by the prime interest rate, which is – in turn – linked to the same overnight interest rate that the Bank of Canada just lowered. As one writer for Renter’s Guide noted, people buy payment, not house prices, which I’m sure many people can relate to.

Individuals making payments on other types of debts may see a difference as well. Like variable-rate mortgages, lines of credit and credit card rates (dependant on lender) are generally tied to a bank’s prime interest rate, which is usually tied to the Bank of Canada’s overnight rate. That means borrowers may see their monthly costs come down, depending on whether their bank cuts its prime interest rate; however, some banks have yet to adjust their rates amidst many concerns. Most pressing is the fact that Canada’s household debt-to-income ratio hit a record high 162.6 percent just this past December.

Any downsides? Well some obvious ones that come to mind is our dollar, which fell dramatically against a variety of major currencies as soon as the Bank of Canada made its announcement. That’s bad news for any of you planning any trips south of the border or abroad. Another negative about a lower Canadian dollar is the higher cost of imports such as food from the USA; however, a major benefit of lower Canadian dollar is the potential increase in Canadian exports. Another potential downside to the drop in interest rate is that it could mean bad news for individuals who count on interest generated from traditional savings accounts.

Interest rates have proven to be, if anything, unpredictable. This decrease is looking like it will be a great opportunity for a majority of homeowners and buyers in the interim, but it will be interesting to see how it plays out and affects the real estate market in the long-term.

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