So, you've heard that the Bank of Canada dropped the overnight rate by .50%. “WHOA! Um, WOW, that’s nuts. Crazy! 'Bill, did you hear!? I knew it!........Soooo, what does that mean, exactly?”

For the layman, we’ll give you some basic info to impress your colleagues around the water cooler so you look like a pretty big deal. Let’s get at it:

1.      Do fixed mortgage rates change?

Your fixed rate mortgage remains unchanged. The Bank of Canada’s overnight rate (the one that just dropped) affects only those carrying a Variable Rate Mortgage (VRM) or Adjustable Rate Mortgage (ARM). A VRM rate goes up and down with prime and the payment stays the same but the amount payable to your principal changes. An ARM rate goes up and down with prime and so does its payment. Fixed rates, completely separate from variable rates, are determined by the Canadian bond yield – a totally different entity.

What’s a bond yield? The Canadian government sells pieces of paper (figuratively speaking) to investors and promises them a certain return over a set term. It’s a SUPER safe way to invest but the returns are low. One thing that should be mentioned here is that the 5yr bond yield just PLUMMETED from 1.60% in January, to .90% today! WHOOOOA. That means, if the yield stays down, fixed mortgage rates will fall in a month or three. Watch, you’ll see!

2.      How much money will I save with this rate drop?

If you are a floating rate mortgage holder, for every $100,000 you have borrowed, your interest savings will increase by about $500 per year. If you have an ARM you can expect around $25/month less per $100,000 borrowed (based on the average amortization).

3.      A rate drop means the economy is down. Are we DOOMED!?

The sky is not falling. This is normal (well, the new normal). These rates move with the ebbs and flows of the Canadian economy. Ups and downs are 100% normal but the news always makes waves. You can DEFINITELY chalk some of the reason for this up to the coronavirus. You can also chalk it up to the Canadian oil market. You can chalk it up to 20 other things that will happen now, later and 5 years from now. Up and down like a yo-yo – that’s how the cycle works.

4.      Should I pick a variable rate now? Or should I choose a fixed rate?

You should do what is best for your life situation. Fixed income borrowers, like pensioners, find solace in steady payments. Young borrowers can handle small payment increases while betting they’ll save more interest by going variable. Everyone is different. I would be lying if I said that I haven’t been pushing fixed rates HARD over the last while. They’ve been lower than variable rates which is not normal. That’s changing now.

5.      Nolan, WHAT’S NEXT!?

Likely more cuts, guys. If we are just entering into the economic effects of viruses and oil issues, the bottom is not clear. The trend, in my humble opinion, will be downward. Which, by all standards, means a HOT real estate market again. Which, honestly, is good for everyone. Oceanvale wins, duh. But so does a large portion of the Canadian economy - real estate professionals, appraisers, real estate lawyers, home inspectors, accountants, renovation companies, paint stores...THE LIST GOES ON!

But the people that will benefit the most is the first time homebuyer that now finds it a bit more affordable to enter the housing market. The pensioner that needs that extra $135/month more than you know. The working parents with young kids that can now justify putting them into soccer because there’s a bit more cash laying around. Not to get all mushy here, but that’s what it’s all about (I’m not crying, you’re crying.).

Sincerely,

Nolan Smith, Broker Extraordinaire