After a prolonged stretch when interest rates remained relatively high, the Bank of Canada (“BoC”) has entered a rate-cutting cycle whereby, on July 24, 2024, we had our second rate cut of 0.25%. This rate reduction followed the initial 0.25% rate cut announced on June 5, 2024. The key policy rate is now 4.50%, down from the high point (for this phase of the economic cycle) of 5.00% reached in July 2023.

As we have begun a period of interest rate cuts with our new key overnight rate sitting at 4.50%, how much of an impact could this have on you? As we did in June, let’s take a brief look at how the BoC’s latest rate decision might affect you and your financial decisions and circumstances.

Lower mortgage rates

If you hold a variable rate mortgage with a fixed payment, a rate cut will affect the proportion of your total payment that goes towards interest. This rate reduction will allocate more of your payment towards principal, helping you pay down your mortgage sooner.

Those who hold a fixed-rate mortgage won’t be immediately impacted, but they may benefit if lower mortgage rates persist when their term is up for renewal.

Lower borrowing costs

For lines of credit and other variable-rate loans, this second rate cut in as many months may reduce your interest charges and help you pay off the principal amount sooner. This means you could potentially retire major debt obligations faster and have some funds available to invest in your (and your family’s) future.

Any extra money you’re able to put toward vehicles such as RRSPs, TFSAs, RESPs, non-registered investment accounts, etc. have the chance to grow in a compound manner over time, potentially helping to secure your future and meet important financial and life goals.

While this latest round of interest rate cuts in Canada isn’t exactly welcome news for savers who enjoy the benefit of higher interest rates from their saving products, lower rates can benefit many people and businesses, either immediately or down the road. For instance, individuals challenged to make ends meet amid high inflation and high interest rates may get some welcome relief. As well, lower borrowing costs could encourage some business owners to invest in innovation and potentially expand operations.

The next interest rate announcement by the BoC is scheduled for September 4, 2024, and BoC Governor Tiff Macklem has suggested that the downside risk of a slowing economy makes it more likely that further rate cuts are on the horizon. However, over the next few weeks much can happen in our domestic economy, worldwide economies or the geopolitical landscape, so it’s unknown at this time whether interest rates in Canada are poised to move again in September.

In the meantime, feel free to speak with an Alterna Advisor to find out if this latest interest rate cut might have a notable effect on your overall finances.