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What you need to know about the most recent Bank of Canada Interest Rate Cut – March 16 2020

The Bank of Canada has lowered its key interest rate by 50 basis points to .75 per cent in an unprecedented and surprise rate cut on Friday. 

Their statement was clear, the coronavirus COVID-19 will impact every Canadian financially, and the Bank of Canada is taking action to ensure they are doing their part to help everyday Canadians, but will this move help you? 

You can read the full announcement here:

Will this interest rate cut help me?

With the majority of Canadian mortgages using a fixed-rate the odds of this rate drop benefiting you is low. Fixed-rate mortgages will not change, although this isn’t the best news while watching rates decrease around you, if you flip the situation and rates were rising just as fast, your fixed-mortgage would be protecting you. So I guess its just a matter of perspective.

The only people this rate drop will benefit are those with a Variable Rate or those that have their mortgage up for renewal or are currently shopping for a new home.

We should see rates drop over the next week, how much they drop is unclear, but this is designed to be a stimulus and Canadian Banks and Mortgage Lenders are usually pretty good respecting the Bank of Canada’s rate decisions and responding by decreasing their rates as well.

The rate drop is also supposed to encourage the economy and keep people buying homes, and keep the markets moving. If it succeeds, then we all benefit from the economy staying active even during these tough times, even if our rate doesn’t actually change.

Is there any help available for my mortgage payment during COVID-19 pandemic?

Yes, you can get help with your mortgage payment as the world screeches to a halt over the COVID-19 pandemic. 

Contact your lender, or your mortgage broker and have them look into options to “Hold a Payment” or “Skip a Payment”. 

Quality mortgage lenders like MCAP have already sent messages to their mortgage clients and offered them details on these programs. They don’t affect your credit, and they don’t affect your relationship with the lender, in fact, these programs are specifically designed for situations like these.

How does Skip a Payment work? 

For most lenders, whatever they call the program (there are many names for it), usually works by simply adding this months interest to your outstanding balance. This, in turn, adds 1 more month to your amortization (the amount of time it takes to fully pay off your mortgage).

The Pros

You don’t have to make a mortgage payment, and some lenders, depending on their policies will allow you to do this up to 4 times, as long as it you have the additional amortization room. 

If you don’t have the room to increase your amortization then the lender typically increases your payment to spread out the missed payments over your remaining amortization period. Since the missed payments are spread over many years the increase is usually very small and likely unnoticeable to your budget.

The Cons

Well, you’re not paying your mortgage down that month, and since the missing interest portion of your payment is added to the balance, you will have to pay a little more interest over the life of your mortgage.

But when faced with missing a payment, this is really not a con at all, a small amount of additional interest to that save your relationship with your lender, your credit score, and even your home is barely worth the mention. 

The only other downfall of this program is you can’t use it on an already missed payment.  Most lenders require you to be in good standing will working out the details, so this is not an escape plan for a missed mortgage payment. 

So if you are thinking about it, here is my recommendation, skip the payment, and if you have extra money and didn’t need to use the program you can use your prepayment options to put the money back on your mortgage. 

When it comes to your mortgage, it’s better to be safe than sorry!

Needed Action

For those shopping for a new home!

It will take a little time for this news to affect bank rates but you could have just saved thousands on your next (or maybe even your first) mortgage. If you have any questions on how this could benefit you give it a few days and then give me a call and we can discuss the impact it may have had to your pre-approval.

For the past few months, Fixed rates have been lower then Variable rates, this decrease may be enough to reopen the conversation for selecting a Variable rate.

We need a little more time to tell, exactly how the banks will react to the lower rate, typically we should see a decrease in both Fixed and Variable Rates, but don’t worry I have my eye on the situation and have you covered.

For those that are already Home Owners!

For Home Owners with a VARIABLE Rate!

No action needed! If the cause of the rate decrease wasn’t so grime I would suggest a little celebration as on your next statement you will see a little extra money coming off your mortgage.

I quick recommendation, don’t lower your monthly payment! If the bank adjusts your payment call them and put it back to where it was. This is a great time to at least keep everything the same and knock some months or even years of your mortgage by taking advantage of lower rates.

For Homeowners with a FIXED Rate!

No action needed!

There is actually not much that you can do anyway, your rate is already protected from events like this, whether rates go up or down there is no impact to your mortgage.

Just make the mental note that in the mortgage industry rates don’t always go up, they do come down, and that a variable rate can be a good idea.

For all Homeowners with a Mortgage

Consider increasing your mortgage payment!

Look interest rates are low, why not calculate what your payment would like if rates where to jump and just start paying that payment now.

Any additional payment that you make above your regular payment goes straight to principal, and small increases can make a huge difference.

Consider putting some extra money towards retirement or savings!

Instead of taking advantage of lower rates by paying your mortgage down faster, consider putting that extra money towards your RSP, TFSA or even start a non-registered investment portfolio and make your mortgage tax-deductible.

Consolidate some debt!

Debt consolidation can be a nasty word, but when done correctly can make a massive impact on your financial situation. Don’t be afraid to reach out to me and discuss options, its the only to know if you could be making your life way easier with a single payment every month vs 3-4.

Consider Home Renovations!

If you wanted that dream kitchen or bathroom, or your house just needs a little work now could be the time. Taking advantage of lower interest rates allows you to get the money you need to renovate without breaking the bank.

Do all four!

There is nothing stopping you from doing everything on this list! I call it a balanced approach. Put a little extra money away for retirement, a slight increase to your mortgage payment, and doing some home renovations can be all done at the same time.

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