Interest Rates Have Declined: What You Need to Know

In recent years, Canadians have been dealing with higher interest rates amid a prolonged period of surging inflation. The Bank of Canada (BoC) raised its key policy rate from 0.25% in March 2020 to 5% in July 2023 – a level the BoC had maintained until announcing on June 5, 2024, that its key policy rate is declining by 0.25%, to 4.75%.

Since the BoC’s overnight lending rate directly influences interest rates charged by financial institutions, this rate reduction will have an impact, positive or negative, on just about everyone. Here’s what you need to know:

Mortgage rates

As a result of the recent reduction in the Prime rate, homeowners on a variable-rate mortgage with a fixed payment will see more of their regular payment being applied to principal and less to interest. For those with an adjustable-rate mortgage where the payment is adjusted in accordance with the changes in the Prime rate, then you should expect to see your payment amount decrease.

If you hold a fixed-rate mortgage, you won’t be affected until it’s time to renew your term, but the same benefits as mentioned above should apply if the trend of lower rates continue. Just keep in mind that if you began your current mortgage term several years ago, the rate may be lower than what you’ll find now, so you could still end up paying a higher mortgage rate upon renewal. Depending on your personal and financial circumstances, you may wish to consult your wealth advisor or mortgage specialist to see if it makes sense to shift from fixed rate to variable rate, given that further BoC rate reductions could be on the horizon as inflationary pressures subside.  If you don’t have a wealth advisor or mortgage specialist, we would be glad to set this relationship up for you to ensure the advice you are getting helps you achieve your financial goals.

Other borrowing costs

Whether it’s credit cards, lines of credit or other loans, this recently announced rate cut may save you some money in interest charges and allow you to pay off the principal amount sooner. You will see a decrease in your overall interest rate if it is tied to the Prime rate. It’s important not to view lower borrowing costs as your free pass to increase spending and take on unnecessary debt. Remember that interest rates were extremely low for decades until this recent post-pandemic run-up, and many people had overextended themselves by buying luxury homes and vehicles or taking lavish vacations and indulging too much on discretionary expenses. Put your interest savings to good use to help secure your financial future!  Our advisors can assist with tailored investment strategies to help maximize your savings potential.

More notable impacts

Historically, the real estate market tends to pick up as interest rates drop as housing becomes more affordable, this could help first-time homebuyers who’ve been on the sidelines waiting for the end of higher mortgage rates and improve sales activities for homeowners looking to sell.

The recent decline in Canadian interest rates has many far-reaching effects – some direct, some less obvious. Come and talk to an Alterna Advisor to see how this rate reduction (with potentially several more to come) could improve your financial well-being.