Mortgage lenders across the country, including the Big 6 banks, announced a 25-basis-point (0.25%) reduction to their key lending rates after the Bank of Canada lowered its overnight target rate to 4.50% Wednesday morning.

This brings prime rate offered by most lenders to 6.70%, down from a recent high of 7.20% just two months ago. TD Bank remains a unique case, with its mortgage prime rate priced 15 bps higher, the result of an additional hike the bank made in 2016 independent of a Bank of Canada rate move.

This marks the second rate reduction for variable-rate borrowers and those with personal or home equity lines of credit (HELOCs) since June as the central bank seeks to support Canada’s weakening economy.

What this means for borrowers

The big winners today are existing variable-rate mortgage holders, who will see their mortgage rate fall a quarter of a percentage point.

Those with adjustable-rate mortgages, whose payments fluctuate as rates change, will see their payments drop by about $15 per $100,000 of mortgage based on a 25-year amortization.

That means that a borrower with a $400,000 mortgage can expect savings of roughly $60 a month following this latest rate cut. Taken together with last month’s rate reduction, these borrowers will now see their payments drop roughly $120 a month.

Those with fixed-payment variable-rate mortgages, comprising roughly 15% of outstanding mortgages in Canada, will experience a shift in their payment allocation. As the prime rate decreases, a larger portion of their payments will go towards paying down the principal, while the interest portion will reduce.

Meanwhile, fixed-rate borrowers can largely ignore today’s news, as their rate remains fixed for the duration of their term.

Variable rates looking more enticing once again

With the prime rate now at 6.70% and further rate cuts anticipated, variable-rate mortgages are gaining renewed appeal among borrowers.

As of the first quarter, 12.9% of new mortgage borrowers opted for a variable-rate mortgage, up from a low of 4.2% in the third quarter of 2023, according to figures from the Bank of Canada. However, this remains below the peak of nearly 57% during the pandemic when variable rates were lower than fixed rates.

Borrowers are shifting preferences for good reason, according to mortgage broker and rate expert Dave Larock of Integrated Mortgage Planners.

“If that timing works out, today’s variable-rate mortgages will win out over today’s fixed-rate options,” he wrote in a recent blog post, with the disclaimer that they’ll have to be willing to start out their term with higher rates compared to fixed-rate alternatives.

Bank of Canada Dave Larock fixed vs. variable prime rate TD mortgage prime variable rate mortgages

Last modified: October 11, 2024