Bank of Canada cuts interest rates - what you need to know

The Bank of Canada cut the interest rate last week in an apparent bid to deal with the economic shock created by the threat of coronavirus.

The Bank reduced the national interest rate by 0.50% to 1.25% on the 4th March, following the cut by the US Federal Reserve the day before.

The threat of coronavirus has caused business activity to fall sharply in some regions and the currency to depreciate, while the Bank warned that business and consumer confidence could fall further.

However, I was still surprised by the change.

The activity has been extremely strong across the Greater Toronto Area this year, with fierce competition and sharp house price increases, so I had wondered if a slowdown might not be a bad thing.

Then again, I am speaking from the bubble that is my local housing market, where the activity is busier than much of the rest of the country. Indeed, the average house price in the GTA rose by an alarming 17% year-on-year in February to $910,290, figures from the Toronto Real Estate Board show.

What it means for mortgages

For mortgage holders, the interest rate cut means variable-rate mortgages have fallen by up to 0.50%, which should put more of your hard-earned cash in your pocket.

Five-year variable rates have largely followed that 0.50% cut, which makes them extremely competitive – in some cases more so than the fixed-rate equivalents.

However, fixed-rate mortgages are also seeing reductions and shouldn’t be ruled out.

Whichever you choose, the base rate cut has suddenly made buying with a mortgage that much more affordable.

Cheaper rates could also result in a surge to refinance for existing homeowners.

What next?

There is speculation that the interest rate could end up being cut twice more to 0.75% this year, depending on how COVID-19 continues to impact the economy.

It may, therefore, be worth taking out a mortgage that allows you to refinance in the not-too-distant future, just in case things become even cheaper.

I worry that the interest rate cut will fuel more significant house price increases across Toronto, making it harder for people to buy long-term. 

I can only hope this is a factor the Bank of Canada is taking into account when deciding on future interest rate policy.