How Does This Recent Bank of Canada Rate Change Impact Me?

Katherine Martin • January 22, 2015

The announcement yesterday from the Bank of Canada that it lowered the target overnight rate to 3/4 per cent has been called the most significant rate announcement in the last 10 years. So the obvious next questions are…

How does this rate change affect me? How does this rate change impact my ability to buy a new home? Do I have increased purchasing power now?

Well… let’s work this through.

Bank of Canada

The Bank of Canada sets what is called the “overnight rate” which has more to do with how banks borrow money among themselves than it does have a direct impact on consumers. However, according to the Bank of Canada website ,

“Changes in the target for the overnight rate influence other interest rates, such as those for consumer loans and mortgages.”

So basically the overnight rate can influence the prime lending rate, but it doesn’t have to… the banks decide that for themselves and subsequently for us.

The prime rate (currently 3%) is what Variable Rate Mortgages are based on. A typical variable rate mortgage will have a component plus or minus to prime. So if the prime rate is 3% and the component is -.5%, your contract rate would be 2.5%.  When the lender changes the prime rate, your rate goes up or down accordingly.

The confusion is a result of a lot of people believing the overnight rate is the prime rate. The over night rate is currently 0.75% whereas the prime rate is still 3%. As of right now, there has been no changes to mortgage rates as a result of the Bank of Canada announcement.

Will Rates Go Down?

Typically the prime lending rate does go down when the Bank of Canada lowers the overnight rate. However this is up to the banks to decide. The banks could decide not to pass along this decrease in their expenses to consumers and just hang on to the profitability. TD bank is already on record as saying they will not be lowering their prime rate in response to this latest Bank of Canada move.

“TD Bank said Thursday it had decided not to cut its prime rate, a decision that “was carefully considered and is based on a number of factors, with the Bank of Canada’s overnight rate only being one of them.” Royal Bank of Canada said it is “considering the impact” of the central bank’s rate cut, but is not changing its mortgage products at this time. Scotiabank told CBC News it had not yet made a decision on whether to cut its prime rate.”

“Our decision regarding our prime rate is impacted by factors beyond just the Bank of Canada’s overnight rate,” said Mohammed Nakhooda, a spokesman for TD Bank. ” Not only do we operate in a competitive environment, but our prime rate is influenced by the broader economic environment, and its impact on credit.”

It is still to be seen what all lenders will do, they are no doubt taking their time to consider all options (while they make more money in the short term).

Variable Rates

Even if all the lenders across the board do decide to lower their prime rate to 2.75%, this will have an impact on current variable rate holders and it will not increase the purchasing power of anyone purchasing a property and securing the mortgage with a variable rate. This is because:

To qualify for a variable rate mortgage, you qualify at the benchmark rate, instead of the contract rate.

The benchmark rate is currently 4.79%, so in order to qualify for the variable rate (which is currently in the mid to low 2% range), you have to be able to afford to qualify at the higher rate. These rules are in place so that when the variable rate mortgage renews in 5 years… there is no significant shock in payment increase if the lending landscape is drastically different.

Fixed Rates

Now, with the recent drop in oil prices, the Canadian dollar falling and the bond market taking a dive as a result of the Bank of Canada rate change, many are predicting that fixed rates will be going down as well.

Unlike the variable rate a 5 year fixed rate is qualified on the contract rate not the benchmark rate. So if the 5 year fixed rate does goes down it will actually increase the purchasing power of a homebuyer.

So, to answer the question directly, will this rate decrease impact the purchasing power of the average homebuyer. No it will not.

There will be less interest paid by variable rate holders but someone purchasing a property with a variable rate will not have any more purchasing power. While someone purchasing a property with a 5 year fixed rate will qualify for more, their rate is in no way tied to prime and they won’t see any savings from the lower rate (if it does go down).

It is good to note that the cost of borrowing money to purchase a home in Canada has never been this cheap. Any extra money paid towards principal will have a huge impact. It would seem that rather than try to use these low rates to purchase a more expensive house, the best plan of action would be to use these low rates to pay off your mortgage more quickly.

But as everyone’s situation is different, it’s hard to give general advice. I would love to talk with you about your situation and help you figure out the best mortgage product for you!

Katherine Martin


Origin Mortgages

Phone: 1-604-454-0843
Email: 
kmartin@planmymortgage.ca
Fax: 1-604-454-0842


RECENT POSTS

By Katherine Martin July 2, 2025
If you’re going through or considering a divorce or separation, you might not be aware that there are mortgage products designed to allow you to refinance your property and buy out your ex-spouse. If you’re like most people, your property is your most significant asset and is where most of your equity is tied up. If this is the case, it’s possible to structure a new mortgage that allows you to purchase the property from your ex-spouse for up to 95% of the property’s value. Alternatively, if your ex-spouse wants to keep the property, they can buy you out using the same program. It’s called the spousal buyout program. Here are some of the common questions people have about the program. Is a finalized separation agreement required? Yes. To qualify, you’ll need to provide the lender with a copy of the signed separation agreement, which clearly outlines asset allocation. Can the net proceeds be used for home renovations or pay off loans? No. The net proceeds can only buy out the other owner’s share of equity and/or pay off joint debt as explicitly agreed upon in the finalized separation agreement. What is the maximum amount that you can access through the program? The maximum equity you can withdraw is the amount agreed upon in the separation agreement to buy out the other owner’s share of the property and/or retire joint debts (if any), not exceeding 95% loan to value. What is the maximum permitted loan to value? The maximum loan to value is the lesser of 95% or the remaining mortgage + the equity required to buy out other owner and/or pay off joint debt (which, in some cases, can total < 95% LTV. The property must be the primary owner-occupied residence. Do all parties have to be on title? Yes. All parties to the transaction have to be current registered owners on title. Your solicitor will be required to confirm this with a title search. Do the parties have to be a married or common-law couple? No. Not only will the spousal buyout program support married and common-law couples who are divorcing or separating, but it’s also designed for friends or siblings who need an exit from a mortgage. The lender can consider this on an exception basis with insurer approval. In this case, as there won’t be a separation agreement, a standard clause will need to be included in the purchase contract to outline the buyout. Is a full appraisal required? Yes. When considering this type of mortgage, a physical appraisal of the property is required as part of the necessary documents to finalize the transaction. While this is a good start to answering some of the questions you might have about getting a mortgage to help you through a marital breakdown, it’s certainly not comprehensive. When you work with an independent mortgage professional, not only do you get a choice between lenders and considerably more mortgage options, but you get the unbiased mortgage advice to ensure you understand all your options and get the right mortgage for you. Please connect anytime; it would be a pleasure to discuss your needs directly and provide you with options to help you secure the best mortgage financing available. Also, please be assured that all communication will be held in the strictest of confidence.
By Katherine Martin June 25, 2025
One of the benefits of working with an independent mortgage professional is having lots of great financing options! Rather than dealing with a single lender with one set of products, independent mortgage professionals work with multiple lenders who offer a wide selection of mortgage financing options that provide more choice. Increased choice in mortgage products is beneficial when your situation isn’t “normal,” or you don’t quite fit the profile of a standard buyer. Purchasing a new construction home through an assignment contract would be a great example of this. Purchasing a new construction home through an assignment contract can be tricky as not every lender wants the added perceived risk of dealing with this type of transaction. Most of these lenders won’t come out and say it; instead, they add a significant list of qualifying conditions to make the process harder. The good news is, there are lenders available exclusively through the broker channel that have favourable policies for assignment purchases. Here are some of the highlights: All standard purchase qualifications apply, including applicable income verification, established credit, and required downpayment Assignments can be at the original purchase price or current market value Minimum 620 beacon score with no previous bankruptcies or consumer proposals The full downpayment must come from the purchaser and not include any incentives from the seller. As far as documentation goes, the lender will want to see the original purchase agreement signed by all parties, the MLS listing, the assignment agreement signed by the builder, the original purchaser, and the new buyer. The lender will also want to see the side agreement between the original purchaser and the new buyer, including the amended purchase price. The lender will want to substantiate the value through a full appraisal. Now, as every situation is different, this list of conditions is in no way exhaustive but meant to show that assigning a new construction purchase contract is doable while highlighting some of the terms necessary to secure financing. If you’re looking to purchase new construction through an assignment contract, or if you’d like to discuss purchasing a home through traditional means, please connect anytime! It would be a pleasure to outline the mortgage products on the market that won’t limit your financing options!