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BoC’s Key Interest Cut Spurs Banks to Lower Prime Rates

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EDITOR’S NOTE: This article, originally published on January 27th, was updated on January 28th to reflect new developments in this ongoing story.

TORONTO – For Canadian home buyers and mortgage holders, the Bank of Canada’s move to lower the key overnight interest rate on January 21 most likely came as a surprise – and led many to discuss the possibility of lowered mortgage rates as a result.

Indeed, the adjustment, which saw the Bank’s key interest rate fall from one per cent to 0.75 per cent, also stunned professionals in the banking and real estate industries. As of January 26, while some banks had moved to adjust interest rates on “certain investment savings accounts,” Canada’s major mortgage lenders had not yet made a decision on whether or not to adjust the interest rates on their mortgage offerings.

Late last week, Shubha Dasgupta, a mortgage specialist with Dominion Lending Centres, spoke with GTA Real Estate News to provide insight on how the banks might respond.

“Typically, what you see is that when the Bank of Canada cuts their overnight lending rate, the bank follows through, and lowers their prime rates. That, in itself, affects the variable rate mortgages that are based off of the prime rate,” Dasgupta explains.

Dasgupta also noted that fixed-rate mortgages, which often correlate with variable-rate mortgages, “are actually lowering” independently of the Bank of Canada’s recent adjustment.

On January 27, RBC became the first bank to lower their prime lending rate from three per cent to 2.85 per cent – only partially reflecting the extent of the Bank of Canada’s 25-point reduction to the target overnight rate. BMO, TD, CIBC, Scotiabank, and the National Bank of Canada later followed suit with identical cuts to their own prime rates.

“The reduction in the prime rate is intended to help companies grow, create jobs and get the economy back to full capacity,” BMO CEO Frank Techar told the Financial Post.

Indeed, the Bank of Canada had already issued a statement last Wednesday, explaining that the key interest rate adjustment was a response to “oil price shock” and a waning Canadian dollar.

“The Bank expects Canada’s economy to gradually strengthen in the second half of this year, with real GDP growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016,” reads the statement.

“The economy is expected to return to full capacity around the end of 2016, a little later than was expected in October.”

In the meantime, prospective and current Canadian homeowners will have to wait and see whether the change precipitates any impact on their monthly mortgage payments.

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