After the Bank of Canada surprised everyone in January with a 0.25 per cent rate cut from 1.0 per cent, the overnight lending rate will stand steady at 0.75 per cent.
Originally cut as result of concerns over falling oil prices and the resulting effects on the Canadian economy and inflation, the overnight rate will remain unchanged for the time being. "Financial conditions in Canada have eased materially since January," said the Bank of Canada, Canada's central bank, in a statement.
What exactly is the overnight rate?
Basically, the overnight rate is the interest rate banks charge each other when they lend money amongst themselves. When the overnight rate increases or decreases, the prime interest rate often follows...usually. This is why the overnight rate may affect your mortgage rate. The overnight rate typically affects the prime interest rate, which in turn has a direct impact on variable rate mortgages (whether wholly variable, or partially).
The prime rate is set by the banks, and it's the most competitive rate they can offer consumers.
"Changes in the target for the overnight rate influence other interest rates, such as those for consumer loans and mortgages. They can also affect the exchange rate of the Canadian dollar," the Bank of Canada says on its website.
How does the overnight lending rate affect fixed mortgages?
Since the January announcement, fixed mortgage rates have also decreased (for those applying for, or renewing, a mortgage), even though fixed rates are not directly affected by the overnight rate in the same way as a variable rate mortgage.
Fixed rates are affected primarily by Government of Canada bond yields (with a corresponding maturity). Since the January 21st BoC announcement, bond yields have trended lower than what's been normal lately. Bond yields however, are based on investor demand for government bonds, so they do not always trend in the same direction as the overnight rate and the trend can change at any time.
- What's a bond yield? Learn more about bond yields, and how they affect your fixed rate mortgage at RateSupermarket.ca
When will the overnight interest rate change next?
How long the overnight rate will stay at 0.75 per cent is anyone's guess, and prior to the rate cut in January, the overnight rate hadn't changed since September, 2010. Eight times a year, the BoC announces whether or not it will change the overnight rate so these are the dates to watch out for. In 2015, the eight dates are:
- January 21 (this is the date the Bank lowered the overnight rate to 0.75%)
- March 4 (the most recent announcement where it was decided to hold the rate steady)
- April 15
- May 27
- July 15
- September 9
- October 21
- December 2
Compare mortgage rates
Lower variable rate mortgages, and possibly even fixed rate mortgages, suggest that this upcoming home buying season could be interesting as those considering buying a home may have even more reason to do so.
If you'll be planning your weekends around open houses, make sure you compare mortgage rates. It's the only way you can be confident that you're getting the best mortgage rate possible.
