Ok, more rate chat to clear up confusion – When the Bank of Canada lowers their rate, this is not a consumer rate – Read on for my response to a client email. 

From the client:

Hi, It’s us again. Looking for some guidance on the new interest rate of 3.25%. 

We are at 4.85%. 

If our current mortgage penalty is 3 months of interest to break, we are looking at $7,800. 

Let us know when you’re available to chat.

My response: 

It’s good to hear from you. I’m going to send out a newsletter today explaining rates.

The recent decrease by the Bank of Canada doesn’t directly affect fixed mortgage rates. These operate in two separate markets. The bond market for the fixed rates, and the BoC for the adjustable, variable and lines of credit rates. 

The Math

The Bank of Canada’s overnight lending rate is now 3.25% after yesterday’s 0.50% decrease (December 11, 2024). This is not the rate consumers receive.

Add the 2% margin, and you get PRIME at 5.25%, right? So why is it 5.45%?

Great question! Here’s the deal: way back in the day, before anyone was really paying attention to rates, the big banks decided not to play fair. When the Bank of Canada dropped rates, the banks didn’t pass along the full decrease to consumers—they gave only partial cuts.

Fast forward to today, and that sneaky little gap has stuck around,. The PRIME rate is now slightly higher than the math suggests. Call it a legacy of bank logic.

Back to the math, However, lenders apply a discount (usually -0.50% to -0.85%, depending on the transaction- there are lower, but they are specials), so for a high-ratio purchase rate, the effective rate is about 4.60%. Rates will be higher for refinances, rental properties, etc. 

RATES ARE NOT STRAIGHTFORWARD 

Your current rate is 4.85% five-year fixed – your new fixed rate would be 4.84% or variable at Prime – 50% = 4.95 % because it would be essentially a refinance. I would wait a bit longer. 

What Does This Mean for You? Right now, nothing. There is nothing to do as there would be no savings to gain.

The difference might look significant, but remember that a 0.25% difference only translates to $12 per $100,000 borrowed – monthly payment. Breaking your mortgage would result in penalties that outweigh the potential savings.

While it’s always an option, it’s not the right time unless you’re eager to make your broker (me!) the only winner here.

I hope this helps clarify things! Let me know if you’d like to chat further.

With Kindness, 
Jacquie 

Again, rates are not straightforward, and Bank of Canada announcements are just that, announcements; consumers do not receive the BoC rate. However, it does create a lot of enthusiasm. 

If you have questions, I am here to support you.

The Bank of Canada’s next policy interest rate announcement is scheduled for Wednesday, January 29, 2025, at 9:45 a.m. Eastern Time.

This announcement will coincide with the release of the quarterly Monetary Policy Report, providing insights into the Bank’s economic projections and assessments.