Carlos Yu, Mortgage Advisor at CIBC

06/05/2024

With the Bank of Canada having cut the overnight rate by 0.25%, it can influence mortgage rates, although the impact on fixed mortgage rates is not as direct as it is for variable mortgage rates.

Given that fixed-rate mortgages are more popular these days, let's explore how this rate cut typically affects mortgage rates.

# # # Variable Mortgage Rates
Variable mortgage rates are directly tied to the prime rate, which is influenced by the Bank of Canada's overnight rate. When the overnight rate is cut, banks usually lower their prime rate, which in turn lowers the interest rates on variable rate mortgages.

# # # Fixed Mortgage Rates
Fixed mortgage rates, on the other hand, are influenced more by the bond market, specifically the yields on government bonds, rather than the overnight rate directly. Here's a step-by-step outline of the process:

1. **Bank of Canada Cuts Overnight Rate**: This signals a more accommodative monetary policy stance and an effort to stimulate economic activity.

2. **Bond Yields Response**: Investors in the bond market may react to the rate cut by adjusting their expectations for economic growth and inflation. Typically, a rate cut leads to lower bond yields as investors anticipate a lower interest rate environment.

3. **Cost of Funds for Banks**: Lower bond yields reduce the cost of funds for banks, as they can borrow at lower rates. This decreased cost of borrowing can eventually lead to lower fixed mortgage rates as banks pass on these savings to consumers.

4. **Fixed Mortgage Rates**: While not guaranteed, the decrease in bond yields can result in lower fixed mortgage rates over time. The exact timing and magnitude of this effect can vary based on other economic factors and the competitive landscape in the mortgage market.

# # # Summary
- **Variable Mortgage Rates**: Directly affected by changes in the overnight rate. A cut in the overnight rate usually leads to a reduction in variable mortgage rates.
- **Fixed Mortgage Rates**: Indirectly affected. A cut in the overnight rate can lead to lower bond yields, which might result in lower fixed mortgage rates.

So, while a cut in the overnight rate by the Bank of Canada can eventually lead to lower fixed mortgage rates, the relationship is less direct and influenced by broader financial market conditions.

09/06/2023

https://www.bankofcanada.ca/2023/09/fad-press-release-2023-09-06/

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is also continuing its policy of quantitative tightening.

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