Big Six Banks Lower Prime Rate by 25 Bps After Bank of Canada Decision
In response to the Bank of Canada’s recent quarter-point rate cut, Canada’s Big Six banks have reduced their prime rate to 4.45%. This adjustment is a significant shift in the lending landscape. TD Bank has also adjusted its mortgage prime, lowering it by 25 basis points to 4.60%. This change, however, maintains a slightly higher threshold compared to other banks, reflecting a pricing strategy established in 2016.
Historical Context of Prime Rate Changes
The current prime rate is the lowest it has been since June 2022. At that time, the Bank of Canada was in the midst of a rapid tightening cycle that propelled borrowing costs to their highest level in 22 years. Since then, the cumulative reduction in the prime rate amounts to 255 basis points, marking one of the most rapid easing phases seen recently.
Impact on Borrowers
The recent cut in the prime rate will have various implications for mortgage borrowers.
- For those with adjustable-rate mortgages, the reduction could mean approximately $14 less in monthly payments for every $100,000 in mortgage debt, assuming a 25-year amortization period.
- Borrowers with fixed-payment variable mortgages will notice that more of their monthly payments will be applied to the principal, even if the overall payment amount remains unchanged.
- Individuals with home equity lines of credit (HELOCs) and personal lines of credit will see a decrease in their interest costs as lenders update their rates.
Mortgage Types and Variability
BMO and Scotiabank, on the other hand, provide true adjustable-rate mortgages. In these loans, payments adjust immediately in response to changes in the prime rate.
Fixed-Rate Mortgages
While fixed-rate mortgages are not directly influenced by prime rate adjustments, they do depend on Government of Canada bond yields. So far this year, these yields have generally declined. However, as of today, the five-year bond yield rose to 2.68%, an increase of 11 basis points. This trend aligns with the Bank of Canada’s statement that its policy rate is suitable for maintaining inflation near target levels, which may temper expectations for further rate cuts.
