Interest rates, which began to rise from pandemic lows in March 2022, have remained steady
since last summer. Although we are still far from reversing those recent hikes, and it’s unlikely
we’ll return to the previous lows, the trend is clear: borrowers will gradually pay less, and savers
will earn less. Here’s a breakdown of what you need to know following the 0.25 percentage point
drop in the Bank of Canada’s overnight rate earlier this month:
Savings Rates
Banks and credit union savings account rates are influenced by several factors, including the
overnight rate, financial market conditions, and competitor comparisons. A drop in the overnight
rate signals to savers that they should expect a decrease in rates, which currently hover around
4%.
Mortgage Rates and Lines of Credit
Mortgage rates are primarily influenced by the bond market, where expectations of a rate cut by
the Bank of Canada have already started to push bond yields down. This could lead to lower
fixed mortgage rates.
TD Bank economist Rishi Sondhi recently projected a 0.4 percentage point decline in the interest
rate on five-year government bonds in the second half of the year, which suggests a similar drop
for fixed-rate mortgages. Many homeowners renewing their mortgages later this year or next will
face higher rates than their previous terms, but potentially not as high as current rates.
Variable-rate mortgage holders have seen their costs rise with each central bank rate increase.
Now, these costs will start to decrease. Those with variable-rate mortgages that adjust
automatically will see a rate drop corresponding to the overnight rate cut. For other variable-rate
mortgages that kept payments static while rates rose, resulting in longer amortization periods,
lower rates will help reduce these extended periods.
People with lines of credit will also get some relief—specifically, a 0.25 percentage point
reduction if banks fully reflect the overnight rate cut in their prime lending rates. Borrowing
costs for lines of credit are based on the prime rate plus a varying markup.
The Housing Market
Lower mortgage rates are expected to entice buyers who have been waiting on the sidelines,
although a significant surge in home prices seems unlikely. “Affordability is still likely to remain
quite stretched,” said Mr. Sondhi. “We don’t anticipate Canadian home sales returning to pre-
pandemic levels on a quarterly basis until next year.”
There’s speculation in the real estate market that buyers are waiting for lower rates to improve
affordability. However, a rush of buying could counteract this, driving home prices up and
negating the benefits of slightly lower mortgage rates.
“If prices rise quickly, it will completely negate the relief from lower mortgage rates,” said
Dominique Lapointe, director of macro strategy for Manulife Investment Management.
GICs
GIC rates tend to follow the same trends as mortgages, so expect returns to start declining. One
and two-year GIC yields have been holding up, with 5% returns still available from alternative
issuers as of Wednesday. Competition among GIC issuers may keep rates high temporarily, but
the overall trend is downward. Delaying the purchase of GICs means missing out on higher
yields.
High-Interest Savings ETFs
These exchange-traded funds, which invest in high-interest savings accounts at major banks,
currently offer rates around 4.8%. As rates fall, these ETFs will adjust accordingly. “If the Bank
of Canada cuts by 25 basis points, you can expect these ETFs’ rates to decrease by the same
amount,” said Naseem Husain, senior vice-president and ETF strategist at Global X Canada.
Adjustments are typically made within 24 hours of the rate change.
Investment savings accounts, a similar alternative to HISA ETFs, will likely see comparable rate
cuts. These accounts, packaged like mutual funds and often traded at no cost, will adjust rates in
line with HISA ETFs.
T-Bill and Money Market ETFs
ETFs and mutual funds holding treasury bills and short-term corporate borrowings will respond
to the lower overnight rate, but not as directly as HISA ETFs. Mr. Husain noted that the T-bill
fund at Global X, formerly Horizons ETFs, holds bills maturing within three months. As these
securities mature and new ones are added, the yield will decrease.
