The long-awaited change in interest rates is finally here. Rates started going up from their lowest point during the pandemic in March 2022 and have stayed the same since last summer. We still have a long way to go before undoing those recent rate increases, and it’s unlikely we’ll return to the old lows. But the direction is clear: borrowers will gradually pay less, and savers will earn less. Here’s a summary of what you need to know after the recent 0.25% drop in the Bank of Canada’s overnight rate.
Savings Account Rate Influences
Rates for savings accounts at banks and credit unions are influenced by factors like the overnight rate, financial market conditions, and competition with other banks. When the overnight rate drops, it signals to savers that they should expect lower rates, which can currently be around 4%.
Mortgage Rates and Lines of Credit
Mortgage rates are mostly affected by changes in the bond market. The expectation of a rate cut by the Bank of Canada has already pushed bond yields down, which could lead to lower fixed mortgage rates.
TD Bank economist Rishi Sondhi recently predicted that the interest rate on five-year bonds issued by the federal government will likely drop by about 0.4 percentage points in the second half of this year. This indicates the possibility of fixed-rate mortgages also decreasing. Many homeowners will be renewing their mortgages later this year and next. They might pay a higher rate than before, but possibly not as high as current rates.
People with variable-rate mortgages faced higher borrowing costs whenever the central bank raised its overnight rate. Now, with rate cuts coming, holders of variable-rate mortgages, which adjust with rate changes, will see their rates go down. Some other variable-rate mortgages kept payments the same as rates rose, leading to less money going towards paying off the loan principal and extending the time it takes to pay off the mortgage. Lower rates will begin to shorten these longer repayment periods.
People who have lines of credit will also benefit. If banks pass on the full overnight rate cut to their prime lending rates, those with lines of credit will see their borrowing costs decrease by a quarter of a percentage point. Interest rates on lines of credit are based on the prime rate plus an additional amount set by the bank.
GICs
GIC rates move with the same market trends as mortgages, so expect returns to start going down. Recently, yields on one- and two-year GICs have stayed strong, with some offering returns as high as 5% on Wednesday from other providers. Competition among GIC issuers to attract investments might keep rates around this level for a bit, but the overall trend is downward. Waiting to buy GICs means missing out on potential returns.
High Interest Savings ETFs
These exchange-traded funds (ETFs) invest in large bank savings accounts that offer higher rates than what regular customers get – around 4.8% as of earlier this week. HISA ETFs have been tracking each increase in the overnight rate, but now that rates are falling, expect the opposite.
“If the Bank of Canada cuts rates by 25 basis points, you would expect the rates of those ETFs to decrease by the same amount,” explained Naseem Husain, Senior Vice President. Rate changes typically occur within 24 hours of the Bank of Canada’s rate adjustment.
Similar rate cuts are likely for investment savings accounts, which are an alternative to HISA ETFs. These accounts are structured like mutual funds and can often be traded without fees, unlike HISA ETFs, which may involve commissions up to $10 for buying and selling.
