Bank of Canada Update – Cutting Benchmark Interest Rate – March 12th

Clinton Wilkins joins Todd Veinotte on 95.7 News Radio to discuss The Bank of Canada cutting its benchmark interest rate by 25 basis points to 2.75%, amidst tariff changes and potential U.S. interest rate increases.

Cut Benchmark Interest Rate

Todd Veinotte
We did get some important things to talk about, because the Bank of Canada cut its benchmark interest rate by 25 basis points, all the while Trump ratcheting up tariffs. Joining us to talk about all of this is Clinton Wilkins, our mortgage guru.

Clinton Wilkins
What a wild ride it’s been, and it’s only Wednesday! I know it’s hard to believe it is. It’s wild, and I was talking to our team on Monday, I said this feels like the early days of COVID. I feel like we’ve gone back in a time machine, five years just with the uncertainty. I think there’s a lot of people that are anxious out there, are the tariffs on? Are the tariffs off? Are they on? Are they off? What’s going on today? It might be different by the time that we’re even done this broadcast, which is just so wild. I think that’s one of the sentiments that the Bank of Canada brought into this decision today. By and large, economists predicted that the key rate was going to be cut, 25 basis points. Bank of Montreal came out earlier this week, I believe, and said they predict the key rate to be down to 2% here by the summer, by July, which means they’re predicting, after today, that we’re going to see at least another 75 basis points in cuts, which is beyond even kind of our prediction that we had on Mortgage 101, when we started this year. We thought that the rates were going to continue to soften, but I think they’re softening quicker than we even thought. The reason that they’re doing this, Todd, is because they want to bolster up the economy. They want to get Canadians to borrow again, and Canadian businesses to start pumping more capital into the market. We’re in a recession. That’s reality, and we may see a very different story in the US, and that’s what I want to caution our listeners to. We could see the US and the FED will increase interest rates, even though we just decreased. This doesn’t happen very often. It’s only happened twice in history where we decoupled from the US. Now, we don’t move in concert. We don’t move the same, we don’t do the same changes. But typically, they go up, we go up, they go down, we go down, typically. But we’re in a situation where their inflation is very high, and we may be in a situation where the Fed will increase the rates there. There’s a lot of uncertainty when it comes to tariffs and what’s going on with trade. I think a lot of people are concerned about the economy, and I think that rolls down to employment in Canada. Are people going to be continuing to be employed? And really what’s going to happen with inflation. So even though we’re seeing these rates go down, that doesn’t necessarily mean you should go out and borrow and spend a whole bunch and pump a whole bunch of money, necessarily, into the economy on the consumer goods, because we want to still keep inflation as low as possible. But we don’t want inflation to go below the target at 2%.

Todd Veinotte
Okay, 2.75% it was almost at historical lows during the pandemic. It was pretty close to zero, was it not?

COVID vs Now

Clinton Wilkins
Yes, we were basically at rock bottom during the pandemic. And the Bank of Canada made announcements outside of their normal schedule because it was such an emergency. And some economists have said that, depending on what happens with the tariffs and the results of our economy, we could see the Bank of Canada making some emergency cuts as well. So obviously, something that we’re going to continue to monitor, the Bank of Canada meets again in April. So really, in just another few weeks, we’re going to see another announcement, and I expect that we’re going to continue to see the Bank of Canada cut the key overnight rate, to continue to bolster up the economy here.

Todd Veinotte
Okay, so for those people who had that five-year-fix, coming to renewal, this is music to their ears, obviously, right?

Fixed Rates and Market Impact

Clinton Wilkins
Yeah. So a variable rate mortgage today is less expensive than they were yesterday by 25 basis points. But I need to urge the listeners that the fixed rates do not move with the Bank of Canada and many people even think, well, the bank account is going to make a decision that’s going to impact the markets. The markets are then going to dictate that the rates are going to be lower. That’s not necessarily the case. The fixed rates are really tied to the bond market, and although the markets have been a real challenge, even just look at yesterday, I expect the rates are going to continue to soften, but they don’t move one to one, so no changes today on fixed rates. And if we’re going to see changes, it may even be weeks or months down the road where we see the fixed rates change. We’re going to continue to monitor it. But variable rate mortgages are certainly a lot more popular today, Todd, than they were yesterday. And historically, a variable rate mortgage is less costly than fixed, but the last couple of years, when the bank has been increasing the key overnight rate. We’ve been almost in an inverse situation. But now today, variable and fixed are nearly the same. And I think later this year, we’re gonna see variable rate mortgages be much less costly than fixed. There are a lot of borrowers who a variable rate mortgage is good for. It’s the ones that can sustain the change. People who are willing to take the risk, it will likely pay off historically. Variable is cheaper right now, there’s another couple good pros. If you need to break your variable rate mortgage early, you’re only gonna pay three months interest. And the other real, big pro on a variable is you can always convert that into a fixed with no penalty. So I think it’s really important when you’re making a big decision like taking a mortgage, and that’s why it’s so important to seek the advice of an unbiased mortgage professional that the right product for you may not be the same as it was a year ago, and it may not be the same as it is one year from now, and that’s where it’s so important to get the advice. Historically, a five-year fixed rate mortgage is the most popular, but I can tell you, we are doing far fewer five-year fixed mortgages today than we were before. I think we may see a little bit more uptick in the coming days, especially with that anxiety that’s going on out there, and a lot of this is being driven by what’s happening in the US. People want some stability, and they’re willing to pay maybe a little bit more, over those five years, just to be stable.

Todd Veinotte
So 25 basis points, let’s say, on a variable mortgage of, I don’t know, half a million dollars. What does that look like when it comes to monthly savings? Just kind of roughly.

Clinton Wilkins
It depends on how big the mortgage is and what the amortization is. In some cases it’s going to be a few dollars. In some cases, it may be hundreds of dollars. It depends on the size of the mortgage. Now, with a variable rate, it could be that the bank prime rate is tied to a bunch of different products, so maybe somebody who has a home equity line of credit, that will become cheaper if you have a variable rate mortgage. There are two ways that they work. One has an adjustable payment, so that payment is going to go down. Now that the prime rate went down, some lenders will take that into account right away, and some will wait until the first of the following month. So, depending on how your lender is set up, that’s going to make it a change. And then there is a more traditional variable mortgage that has a static payment, and the amortization will get shorter. That’s the type of product that I have myself. So I started at a 25-year amortization when I did it. I just did a new mortgage last year, and I’m already down to 14 years just because the amortization kept on getting shorter as the prime rate went down. There are pros and cons to every type of product, and people’s risk tolerance is different, and that’s why I think it’s really important to ask the questions and understand, the product that it’s gonna be best suited for your needs.

Todd Veinotte
But basis point cuts are 25 basis points, which is a lot of money for a lot of people.

What’s Coming Next?

Clinton Wilkins
If we’re talking like $5,000, depending on their amortization over five years. So it’s a lot of money in people’s pockets. And the way that Bank of Canada interest cuts go, we typically see cut, cut, cut until we get to the floor, and then we see a plateau before we start seeing increases. A reason that the Bank of Canada is going to continue to cut, is if the inflation is still low, depending on what happens with the job numbers, and what depends what happens with GDP, they want to get to the floor eventually, and then they want to hold until we get into another inflation type environment. Obviously with COVID, the government pumped a lot of capital into the pockets of Canadians, and that made inflation become a runaway train. I think the bank Canada was a little bit late to the party with the increases, and that’s why they had to go for longer than maybe people thought, and higher. And I think we’re going into a different situation. And it’s interesting, even this weekend, that Mark Carney became the leader of the Liberal Party, and is going to be the prime minister here of Canada. He was the governor of the Bank of Canada and very, very versed in this economic situation. So it’ll be interesting to see what happens even in the coming weeks and months.

Todd Veinotte
Thanks so much for coming in. Always a treat, my friend.