How Does the Bank of Canada Rate Affect the Cost of Your House?

Wooden house with coins on the scales. The concept of real estate purchase. Sale of property. Payment of the mortgage. Redemption of taxes. Tax refund. Credit for the apartment.

Your one big goal this year may be to buy a house. But with the fluctuation in home prices, you feel discouraged.  

Knowing how the Bank of Canada’s rates affect home prices helps you make better plans for your home purchase.  

In this article, you would learn the relationship between the Bank of Canada’s policy rate and the cost of owning a home. Ready? 

Everything You Need to Know about the Bank of Canada’s Rate

The Bank of Canada’s (BoC) rates already impact you in some way. Got unpaid credit cards or line of credit? Your unpaid balance is linked to the BoC’s policy rate.

The BoC rate is a benchmark interest rate/policy rate set by the Bank of Canada to regulate the base interest rates used by banks to lend and borrow funds. Everything you get from a financial institution e.g. variable mortgages, line of credits, are all calculated using the BoC rate at the time of purchase.       

With this benchmark rate, the BoC keeps inflation in check and ensures a balanced economy. When the rate is low, consumers are encouraged to borrow more while high rates lead to less borrowing and more saving.  

What Influences Changes in the BoC’s Policy Rates?

Usually, the BoC’s rates are based on the Consumer Price Index; a ‘basket’ of goods and services which represent consumer spending across Canada. It also makes use of a 2% target inflation rate. 

Typically, the BoC reviews benchmark interest rate eight times per year, while considering both local and global factors.

At a 2% inflation rate, the BoC’s benchmark rate is stable, but if inflation rate rises, the BoC’s rate has to be raised to stop people from borrowing and encourage them to save. 

However, if inflation rate falls and a recession is imminent, then the policy rate has to be lowered so people are encouraged to borrow.

With the current COVID-19 pandemic, the Bank of Canada has had to review the benchmark rate a few times in 2020, and the rate has moved from 1.75% to 0.25%. 

The BoC Rate and Homeownership

The Bank of Canada’s policy rate directly influences variable mortgage rates. Since the BoC’s rate is close to zero, variable mortgage rates have also become very low.

Fixed mortgage rates, on the other hand, follow the Government of Canada’s bond yields. The pandemic has also caused a decline in bond yields, and this has led to lower fixed mortgage rates.   

As a homeowner, this is interesting because:

  • When BoC rates are low, you get variable-rate mortgages at cheaper rates since they are tied to Canada prime rate
  • When BoC rates are high, you get variable-rate mortgages at more expensive rates

The Bottom Line

  • The BoC’s rate is at a historical low. Variable mortgage rates have also fallen. 
  • As a potential homeowner, you can get some of the lowest variable mortgage rates in Canadian history.
  • Fixed mortgage rates follow the Government of Canada’s bond yields, not the BoC’s overnight rate. These fixed rates are also reducing.
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