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Bank of Canada rate cut to mean cheaper borrowing and lower interest on savings

TORONTO — The Bank of Canada cut its key lending rate by half a percentage point on Wednesday over concerns of the novel coronavirus. Here’s some of the implications of the change:

Real Estate

The lower rate will translate into lower mortgage rates, though it remains to be seen how much of the savings financial institutions will pass on, says James Laird. Anything they don’t pass is profit for them.

“Any area that’s not seeing change is simply because the financial institutions are taking more profit. The cost of funds has dropped.”

A full 50-basis cut to a $450,000 mortgage on a 2.6 variable rate would shift the mortgage rate to 2.1 per cent, and mean about $115 per month in savings per month, while an $800,000 mortgage is more like $200 a month in savings.

Phil Soper, CEO of Royal LePage, said the lower rates will further stimulate the real estate market, which he said will be helpful for slower markets in the Prairies and Newfoundland, but will drive further unbalance to already heated markets like the Greater Toronto Area.

“The challenge is if prices get too far ahead of underlying income growth, it triggers substantial corrections.”

He said there hasn’t been a significant effect on the real estate market yet because of the virus impacts, but that foreign buying could drop because of it.

Lines of credit

Credit card rates aren’t expected to change, but rates for auto loans and general lines of credit should also decrease. This could make it easier to pay off higher interest loans, but the lower rates might also make banks less eager to issue loans, said Doug Hoyes, a licensed insolvency trustee at Hoyes, Michalos & Associates Inc. He said that anecdotally some financial institutions are already getting more cautious on loans given the uncertainty about the economy. Hoyes says the rate cut is a good time to help pay off debt

“I would not think of it as great, I can borrow more. I would think of it as an opportunity to have more of my payment applied to principal, because the interest component will go down.”

He said the rate cut is a sign that there could be a recession and people should factor in maybe not getting the raise they’re expecting or even getting laid off.

“Lowering interest rates is a signal that the Bank of Canada is worried. And so if the experts are worried, I guess they’re trying to tell us maybe we should be as well.”

Savings rates

The flip side of cheaper borrowing is that interest rates for savings accounts and guaranteed investment certificates will likely drop as well, said Laird.

“This type of environment, with rates very very low, puts a lot of pressure on people approaching retirement or in retirement who are net savers,” he said.

Given the potential impacts the virus may have on the economy, however, it could still be prudent to increase savings, said Michelle Pommells, CEO of Credit Counselling Canada.

“Looking at how you can increase your savings, given the uncertainties in the market, would be a sensible thing to do, albeit knowing that the return on investment will start to see some pressure there.”

This report by The Canadian Press was first published March 4, 2020.

The Canadian Press

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