A recap on how the Bank of Canada impacts your mortgage

If you’re a home owner in Canada, or a prospective home buyer, you’ve likely heard a lot about the Bank of Canada (BoC) over the past few years. The central bank has been closely followed on the news, on social media, and in everyday conversations with friends and family. This makes sense, considering how much of an impact the BoC has on Canadians and their homeownership journeys. However, do you know exactly how the central bank’s actions affect you? You don’t need to be an expert, but it’s important to understand how home owners are impacted, and why you should care. Here’s a brief review on what you should know!

The Bank of Canada’s role

First, let’s do a quick recap on what the Bank of Canada actually does. The BoC is Canada’s central bank. It is responsible for setting what is called the overnight lending rate, which is the rate financial institutions then use to trade with each other. The BoC aims to keep inflation at around two per cent to support economic growth. To do this, they must increase or decrease the overnight rate to reflect current economic conditions.

The overnight lending rate doesn’t directly change and control mortgage rates, but it plays a huge role in how they develop. This is especially true for variable-rate mortgages.

The impact on variable and fixed-rate mortgages

There are two main types of mortgages, which are variable-rate and fixed-rate. The Bank of Canada’s actions affect each mortgage type, but in different ways.

Variable-rate mortgages change alongside BoC rate fluctuations. This mortgage product depends on your lender’s prime rate, and these prime rates are shaped by the overnight lending rate. If the Bank of Canada lowered the overnight rate by 0.5 per cent, for example, your lender’s prime rate would also decrease by the same amount. In turn, this means your monthly mortgage payments would lower. During periods of low interest rates, variable-rate products can help home owners save money on their mortgage payments. On the flip side, though, your payments could increase if the overnight lending rate were to go up. Variable-rate mortgage holders take the risks and rewards that come with this product.

Fixed-rate mortgages are still affected by the Bank of Canada’s actions, but not as immediately or directly. Your fixed rate will stay the same throughout your mortgage term, even if the overnight lending rate changes. This means your payments will neither increase nor decrease during this period, which offers a bit more stability. However, there is still a bit of a domino effect that starts with the central bank. If it were to raise the overnight rate, for example, bond yields would likely increase as well, and this is what influences fixed-rate mortgages. By the time you reach your mortgage renewal period, your new fixed rate might be significantly higher or lower than what you originally signed.

How are you affected?

As a home owner, what does all of this mean for you? There are a couple key points to take away. If you have a variable-rate mortgage, your monthly payments are directly and immediately affected by the Bank of Canada’s actions. When it lowers rates, you will pay less. When it increases rates, your monthly costs will rise.

If you have a fixed-rate mortgage, it can be a bit trickier to keep track of how the central bank’s actions will impact you. Try to keep an eye on the BoC’s activities throughout the duration of your mortgage term. This way, you won’t be surprised when your renewal time comes, in case your rate will be increasing.

If you are hoping to buy a home in the near future, it’s a good idea to follow along with the Bank of Canada’s movements. This will help you prepare for entering the housing market, and you can plan the best time to dive in. After all, current market conditions will impact your affordability and purchasing power!

Here’s how your mortgage broker can help

As mortgage brokers, we are here to help current and future home owners navigate the changing housing market. The best thing you can do for yourself is stay updated on the Bank of Canada’s actions. It holds interest rate announcements eight times per year, and these are the occasions when rates could either rise or fall. Do your best to stay updated on these movements so you have an idea of which direction the trends are moving. If your mortgage is coming up for renewal within the next year or two, now is a good time to start evaluating your options. You don’t need to wait until it’s time to sign your renewal to review what’s out there! We can help you understand if a better option is available for you.

The Bank of Canada plays a huge role in shaping the housing market and mortgage rates. While you cannot control interest rate fluctuations, you can do your best to prepare for them. Having a mortgage that fits your goals and budget is essential! If you are looking to discuss your options with a mortgage broker, reach out to us today to evaluate your situation.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.