How Does the Bank of Canada Impact Your Mortgage?
Purchasing a home is one of the most significant financial decisions most people will ever make. After you find the perfect property and secure a mortgage, the Bank of Canada greatly influences the terms and rates of your mortgage. Their actions have a ripple effect on the economy and, consequently, on how much you'll pay for your mortgage.
Let's look at how the Bank of Canada impacts your mortgage and what it means for homeowners and prospective buyers.
The Role of the Bank of Canada
The Bank of Canada is Canada's central bank and is responsible for the nation's monetary policy and the financial system's stability. One of its primary mandates is to keep inflation low, stable, and predictable. It sets the target for the overnight interest rate, also known as the "key policy rate."1
What is the Overnight Interest Rate?
The overnight interest rate is the rate at which major financial institutions borrow and lend one-day (or "overnight") funds.2 This rate influences the borrowing costs for consumers and businesses. When the Bank of Canada raises or lowers this rate, it has a cascading effect on various financial products, including mortgages.
The Overnight Interest Rate's Impact on Fixed-Rate Mortgages
Fixed-rate mortgages are the most common type of mortgage in Canada.3 These mortgages have a set interest rate for the entire term (often 5 years or longer), providing homeowners with predictability regarding their monthly payments.
Banks and lenders typically increase their fixed mortgage rates when the Bank of Canada raises the overnight rate. This means if you're refinancing your mortgage or applying for a new one during a period of rate hikes, you can expect to pay more in interest. Higher rates can make homeownership more expensive and might impact your finances.
Conversely, a decrease in the overnight rate often leads to lower fixed mortgage rates. Homeowners may be able to refinance at a lower rate, potentially reducing their monthly payments or shortening their amortization period.
The Overnight Interest Rate's Impact on Variable-Rate Mortgages
Variable-rate mortgages have interest rates that can change over time, typically tied to the prime rate set by banks, which in turn is influenced by the Bank of Canada's overnight rate.
When the BoC raises the overnight rate, those with variable-rate mortgages will likely see an increase in their interest payments. This can lead to higher monthly costs for homeowners. Conversely, a rate cut can lead to lower interest payments for variable-rate mortgage holders.
The Bank of Canada's decisions on the overnight interest rate significantly impact the borrowing costs for Canadians, including those with mortgages. Whether you're a prospective homebuyer, a current homeowner, or considering a refinance, understanding how the Bank of Canada affects mortgage rates is essential.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.