The Bank of Canada recently announced another rate cut. Those with a variable rate interest are reaping the benefits of a lower interest rate. However, clients who are in a fixed rate mortgage, or entering into fixed terms are wondering: why are fixed interest rates not seeing any relief?
What's Happening with Fixed Interest Rates?
Bank of Canada Announcement
The Bank of Canada has lowered their overnight target rate by 50bps
The new overnight target rate is setting at 0.25%
This is the second rate drop in the last two weeks
Why did the Bank of Canada Drop the Rate Again?
To provide support to the Canadian financial system and economy during the COVID-19 pandemic
To reduce monthly payments on floating debt (ie: line of credits, credit cards, and variable rate mortgages)
Why are Fixed Mortgages Interest Rates Increasing for New Loans?
Market liquidity is now the growing issue as people are drawing from their lines of credit and moving to cash
Liquidity has dried up in all financial markets
With a slowing to frozen economy, the banks' default risks are increasing, while their earnings decrease
In order to increase liquidity, the banks are feeling pressure from investors to increase the cost of funds, which in turn will increase fixed mortgage interest rates
As well, with rising costs and falling revenue, the banks are tightening their belts and variable rate discounts now remain low or have a premium *The information above is taken from Cherry Cooper, Chief Economist of DLC
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