How the BoC interest rate cut will affect mortgages

Amid sliding oil prices and a sluggish Canadian economy, the Bank of Canada defied prior predictions and actually lowered the key interest rate today by a quarter-percentage point—from 1% to 0.75%.

It’s the first time the central bank has moved the overnight rate since September 2010—a move the bank calls “insurance” against the potentially destructive effects of the global oil price collapse. Canada is largely impacted by recent drops in barrel prices as we are an oil-dependent economy.

Most economists had predicted the central bank would stay the course with today’s interest rate announcement—neither hiking or lowering the rate. After today’s shocker, any predictions of a future rate increase, either later this year or early 2016, are now suspect.

That’s because the central bank’s overnight target rate sets the tone for determining where mortgage rates will go. If the Bank of Canada raises it’s overnight rate, it will cost more for your local big bank to borrow. To recover these costs, banks raise their mortgage rates. But if the overnight rate decreases, bank’s will look to compete for your business prompting mortgage rates to drop.

For those of you who love historical snapshots, Trading Economics states that the overnight interest rates in Canada averaged 6% between 1990 to 2015, reaching an all time high of 16% in February 1991 and a record low of 0.25% in April 2009.

The table below charts the average posted variable and fixed-rate five-year mortgages available to Canadians over the last decade. I’ve also listed average housing prices for the last 10 years, as well as Canada Savings Bond returns (a default comparison for determining whether or not to pay down your mortgage, see the “What every homeowner should know in 2015” for a simple explanation), and finally the default rate of Canadian residential mortgages.

Year	Average Canadian House Price	Average Variable Mortgage Rate	Average 5-Year Fixed Rate	Canada Savings Bond (Posted Dec. Rate)	Residential Mortgage Default Rate
2015	N/A	3%	4.79%	1.40%	N/A
2014	$408,500	3%	4.91%	1.20%	0.28%*
2013	$382,613	3%	5.23%	1.00%	0.32%
2012	$363,477	3%	5.27%	1.00%	0.33%
2011	$362,397	3%	5.40%	0.50%	0.38%
2010	$338,732	2.60%	5.57%	0.65%	0.43%
2009	$320,020	2.42%	5.72%	0.40%	0.45%
2008	$304,612	4.79%	7.10%	1.85%	0.33%
2007	$306,743	6.10%	7.01%	3.25%	0.26%
2006	$276,904	5.76%	6.64%	3.00%	0.25%
2005	$249,021	4.41%	5.97%	2.00%	0.27%
2004	$226,575	1.50%	0.26%	N/A	N/A
2003	$207,321	1.65%	0.33%	N/A	N/A