As a real estate brokerage, we often get questions from clients about interest rates and how they impact their mortgages. Recently, with the Bank of Canada’s latest rate cut, there’s been some confusion regarding the difference between the Overnight Rate and the Prime Rate. Understanding these rates is essential for anyone navigating the mortgage market, so let’s break it down and clarify how each one affects homebuyers and their mortgage options.
What’s the Difference Between the Overnight Rate and the Prime Rate?
You may have heard that the Bank of Canada (BoC) has recently reduced its Overnight Rate, but you might also notice that this doesn’t always translate to an immediate drop in mortgage rates—especially if you have a fixed-rate mortgage. This is what it means:
- Overnight Rate – This is the interest rate at which major banks lend money to each other overnight. It directly impacts short-term borrowing costs and is a key tool the Bank of Canada uses to control the economy.
- Prime Rate – The Prime Rate is the interest rate that banks charge their best (most creditworthy) customers. For most consumers, their variable-rate mortgages are tied to the Prime Rate. Currently, the Prime Rate is at 5.45%, and this is important because it dictates the rates for adjustable-rate mortgages (ARMs) and variable-rate mortgages (VRMs).
How Do These Rates Impact Your Mortgage?
If you’re on a variable-rate mortgage (VRM), your interest rate is tied to the Prime Rate. So, when the Bank of Canada changes its Overnight Rate, it affects the Prime Rate, and subsequently, your mortgage rate. However, fixed-rate mortgages are unaffected by changes to the Overnight Rate. Fixed-rate mortgages are priced off of Government of Canada 5-year bond yields, which are influenced by global factors like U.S. Treasuries.
Here’s a breakdown of the key mortgage types:
- Adjustable-Rate Mortgages (ARM): Your payments will change as the Prime Rate fluctuates. When the Prime Rate goes up, your payments will rise, and when it goes down, your payments may decrease.
- Variable-Rate Mortgages (VRM): While your monthly payments may stay the same, the portion of your payment going toward interest will change as the Prime Rate changes.
- Fixed-Rate Mortgages: The interest rate is locked in for the duration of your mortgage term, so changes in the Overnight or Prime Rate won’t impact your payments.
Fixed-Rate Mortgages and the Market Outlook
Many homebuyers looking for fixed-rate mortgages are wondering if we’ll see any major rate drops in the near future. While there has been a notable 150 basis point drop over the past year, fixed rates are unlikely to drop significantly further unless both the U.S. and Canadian economies experience a sharp downturn.
Fixed-rate mortgage rates in Canada are primarily influenced by Government of Canada 5-year bond yields, which, as mentioned, are closely tied to global factors, such as U.S. Treasuries.
Current Interest Rate Snapshot
For those looking to purchase a home, here’s a snapshot of the current rates (please note that these are subject to change and may vary depending on your financial situation and down payment):
- 1-year fixed: 6.14% (⬇)
- 2-year fixed: 4.89% (⬇)
- 3-year fixed: 4.24% (–)
- 4-year fixed: 4.59% (⬇)
- 5-year fixed (less than 20% down): 4.19% to 4.34% (–)
- 5-year fixed (more than 20% down): 4.29% to 4.39% (–)
- 5-year variable-rate: 4.55% (Prime – 0.90%) (⬇)
Important Note: Rates for rental properties, refinances, and certain other products may carry an additional premium of 0.10% to 0.20%.
Understanding Mortgage Rate Changes
You might be wondering: why don’t we see fixed mortgage rates follow the Bank of Canada’s rate cuts directly? It’s important to understand that fixed-rate mortgages are tied to bond yields, not the Overnight or Prime rates. These yields can change due to market conditions, including inflation expectations and other economic factors, not just interest rate changes by the Bank of Canada.
Navigating mortgage rates can be tricky, but understanding the difference between the Overnight Rate and the Prime Rate is essential. If you’re considering buying a home or refinancing, knowing how these rates work can help you make informed decisions. If you’re considering a variable-rate mortgage, your payments will be tied to the Prime Rate, while fixed-rate mortgages offer stability throughout your term.
Feel free to reach out if you have any questions or would like more information on mortgage rates and how they might impact your homebuying journey. We would be happy to connect you without trusted professionals.
Need personalized advice? Call us or visit our office in Milton to get started!
Disclaimer: Rates and terms mentioned above are subject to change. Please consult with a mortgage advisor to get personalized rate information based on your financial situation.
