The Bank of Canada has announced a cut in its key interest rate, which directly and indirectly influences the interest rates offered by banks. However, the effect on mortgage rates depends on several factors.

1. Immediate effect on variable rates

The key interest rate has a direct influence on the banks’ prime rate, which serves as a benchmark for variable mortgage rates. When it falls, banks generally adjust their prime rates downwards, reducing payments for borrowers with variable-rate mortgages. However, this decrease is not always automatic or complete, as banks adjust according to their own borrowing costs and profit margins.

2. Indirect effect on fixed rates

Fixed mortgage rates are most influenced by Canadian government bonds (especially 5-year bonds), which react to market expectations. If a cut in the key interest rate leads to lower bond yields, then fixed rates could follow suit. However, banks also factor in other variables (inflation, competition, economic risks), so the impact on fixed rates may be more gradual and less predictable.

3. Reactions from financial institutions

• The major banks may choose to lower their variable rates, but sometimes not by the same proportion as the key rate cut.
• For fixed rates, financial institutions will wait to see how bond markets evolve before adjusting their offers.
• If the Bank of Canada announces several consecutive rate cuts, lenders will be more inclined to adjust their rates downwards

What this means for you

• Variable rates: monthly payments are likely to drop for those who already have a variable loan. Those considering a mortgage will need to assess whether variable is becoming an attractive option again.
• Fixed rates: The impact is more uncertain in the short term, but if the downward trend continues, there could be opportunities to secure a good rate.
• Strategy for buyers/sellers: This drop could improve affordability and stimulate demand, which is something to keep an eye on for the Montreal real estate market.

Don’t hesitate to contact us at 514.975.1133 or by e-mail, Eric Jolander your real estate brokerage reference.