Why you should pay attention to the Bank of Canada

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You’ve probably seen a few headlines about the Bank of Canada’s (BoC) recent surprise decision to drop its key interest rate to 0.75 per cent. Related reading includes how the economy has shaped the central bank’s decision to change the rate, and how the monetary policy has been updated. It’s a lot of information packed into one article, so don’t feel bad if some of it goes over your head at first.
However, if you have a mortgage – particularly a variable-rate mortgage – you may want to add a calendar reminder for each BoC announcement, released every six weeks. Why? Well, because if the overnight lending rate goes up, so could your monthly mortgage payment.

To explain how this works, let’s start with some background information. The overnight lending rate is the interest rate at which banks borrow and lend money to one another, to cover the transactions they make each day. Changes to this interest rate can directly result in changes to other interest rates, such as for consumer loans and, you guessed it – mortgages! This is because each bank’s prime rate is attached to the overnight lending rate. So, as an example, if the overnight lending rate goes up by 0.50 per cent, your bank’s prime rate will also go up by 0.50 per cent. And if you have a variable-rate mortgage, which is attached to prime rate, your mortgage rate and payment will follow suit.
Let’s assume you bought a home for $400,000, put down 10 per cent and amortized your mortgage loan over 25 years. If your bank gave you a five-year variable-rate mortgage of prime minus 0.50 per cent (say, at 2.50 per cent), your monthly mortgage payment would be $1,651. If, at any time during that five-year term, the overnight lending rate went up by one per cent, your bank’s prime rate – and therefore your mortgage rate – would also go up by one per cent (so you’d be up to 3.50 per cent). At that rate, your monthly mortgage payment would be $1,841, which is an additional $190 per month or $2,280 per year you’d need to find in your budget to pay for.
Before this latest BoC rate announcement, the overnight lending rate sat at one per cent for four years straight. Economists don’t predict any major upward movement in the near future, so you may not need to worry about this for a while.
However, its a good idea pay attention to what the BoC says in its announcements, and prepare your budget for what’s to come.
By Alyssa Richard – founder and CEO of ratehub.ca, a mortgage rate comparison site that aims to empower Canadians to make smart financial decisions.
Source: METRO VANCOUVER NEW CONDO GUIDE FEBRUARY 6 – 20, 2015