So let start by defining what an overnight rate is: The Bank of Canada sets what is called the “overnight rate” which has more to do with how banks borrow money among themselves than it does have a direct impact on consumers. To make is short and simple: The prime rate is not the overnight rate.

The change to the overnight rate has no direct impact to mortgage rates. According to the Bank of Canada: “Changes in the target for the overnight rate influence other interest rates, such as those for consumer loans and mortgages.” In other words the overnight rate can influence the prime lending rate, but it doesn’t have to, and ultimately the banks are in charge of making that decision.

A drop in the overnight rate does not mean banks will pass this savings to us.
Although for the past several years the Banks have followed the prime rate drop, they didn’t do so on January 21st 2015, when the overnight rate fell by .25% while the banks only dropped by .15%. As we expected, the next time the overnight rate dropped in mid July, the same thing happened, overnight dropped by .25% while thebanks lowered by only .15%….
You will not qualify to borrow more money because of the lower prime rate.
To qualify for a variable rate mortgage, you must qualify at the benchmark rate, instead of the contract rate. The benchmark rate is currently 4.64%, so in order to qualify for the variable rate, you have to be able to afford to qualify at the higher rate. These rules are in place so that when the Prime rate does increase or when it’s time to renew your mortgage in 5 years, you won’t be faced with a future payment shock , and you still will be able to comfortably afford your mortgage payments.

Unlike the variable rate, a 5 year fixed rate is qualified on the contract rate not the benchmark rate. So if the 5 year fixed rate does go down you might qualify for a slightly higher purchaser price.

Fixed rate mortgages are not affected by this rate cut.
If you currently have a fixed rate, nothing happens to your interest rate. Also, if you are looking to take out a new fixed rate mortgage, the rates have not changed much. The overnight rate influences the prime lending rate, which is used for variable rate mortgages. Fixed rates are influenced by the bond yields: these yields affect many parts of the economy, from residential mortgage rates to the values of Canadians’ pensions.

So what impact did the recent drop actually have? If you are currently in a variable rate mortgage, the your interest rate just went down by whooping .15%

Needless to say, it would have been nice to see the full .25% passed along, but the .15% is better than nothing. I suggest you take advantage of these low rates to pay off your mortgage more quickly. If you want to know how to do this, give me a call at 647-702-1302 or drop me a line at ashley@bemortgagewise.com