Earlier this month, the Bank of Canada made another jumbo rate cut of half a percentage point (0.50%) off the prime lending rate. Let's take a look at what this means for you as a current or future homeowner, as well as what this means for the state of our economy in Canada.
To begin, if you have a variable rate mortgage, since June you've seen your interest rate be cut by 1.75%, which is a major drop in interest rate.
To put this into context, what this means is that for every $100,000 of mortgage money that you currently owe on your amortized mortgage, you should have seen your payment drop by $105 per month.
If you're in a static variable rate mortgage, then that means you haven't seen your payment be adjusted at all, but that does mean that those same numbers are now being applied towards your principal and less towards the interest reducing your overall amortization.
Now, if you have a balance on your home equity line of credit (HELOC), for every $100,000 that you owe on that HELOC, you will have seen your payment drop by $142 since the rate cut started in June.
Now as much as we'd love to believe that the recent rate cuts are happening simply out of the kindness of the government’s hearts, and they're simply trying to give us a leg up and a break from these high interest rates, there's actually reasons why they are dropping the interest rate.
First, unemployment is up at 6.8%, which is the highest it's been since during the pandemic in September of 2021 which is a strong indicator of the weak levels of job-creation occurring in Canada. This indicates a poor climate for business growth and entrepreneurship in Canada.
Another reason why you're seeing these aggressive rate cuts is GDP is slowing.
GDP is gross domestic product, which is related to how active an economy is being in producing good and services that can exported or sold for profit.
Economists originally had forecasted a 1.5% GDP growth and recent reports are showing it came in at a dismal 1%. So that means that we as a country are not doing very well as an economy and to help stimulate our economy, the Bank of Canada is choosing to drop interest rates aggressively to try and catch up.
Now for any of you who had a variable rate or were watching interest rates during the pandemic and saw the massive rate drops when the pandemic originally started, this will look very familiar to you.
This is an important caution to all of those who have learned during the lockdowns that although interest rates are dropping - and they're dropping fast - that's not always a good thing for the overall picture of a country.
So keep your eyes close on interest rates and the stats coming around the direction of the economy.
Because the last time we saw rates drop as aggressively as they did, guess what? They skyrocketed back up a few years later triggering the current climate we are working our way through.
If you have questions regarding your own situation or in general regarding the future of interest rates, feel free to give us a call or send us an email and we'll be more than happy to help you out.
