The Bank of Canada cut its prime interest rate a couple weeks ago and the virtual water cooler has been dominated by talk of it ever since.
Who’s been affected by the cut?
- Mortgage brokers
- Equity lenders
- Home sellers
People who need to borrow money or wish to invest will experience a change in the cost of borrowing or investing.
Most homebuyers are thrilled because of what the rate cut represents, however, since rates are already at such historically low levels, the savings when buying a home won’t be all that substantial. Monthly mortgage payments, however, will eat up a bigger chunk of principal rather than interest for homeowners with variable rate mortgages.
Selling a home will get a boost as well because buyers are motivated to take advantage of the low rates. Since prices in Vancouver are driving millennials away from the market, the rate cut might entice them to stay.
What does this all mean for brokers and lenders on the other side of the fence?
What Attracts Customers?
Despite the rate cut, the only bank to announce a lower prime lending rate was Toronto Dominion. Some banks believe since we’re still in the summer house-buying season that significant action isn’t required, but in the middle of an economic downturn on the heels of the lowest oil prices in years, will the summer sun be enough to keep people coming buying new homes?
What do you think? As a broker, do you think consumers will be happy enough because of the lower rates already being enjoyed before the BOC’s cut? Or do you think an extra financial incentive will earn you more business?
If there’s any one element that’s consistent across each and every Canadian consumer, it’s that they enjoy saving money wherever possible.
The Reality of Interest Rates
Rates won’t remain this low forever. The economy will eventually rebound - when is anyone’s guess, but it will happen as the supply and demand in the oil and gas industry evens out.
As brokers and lenders we ought to be accustomed to a certain amount of uncertainty, but banking on low rates staying low is a dangerous game.
“While we haven’t seen rates rise in five years, we all know that eventually they will rise and when they do people that are stretched or over-leveraged will start to feel the impact. That’s when a good bet turns into a bad investment.”Romana King, MoneySense
Knowledge is Power (& Savings)
Unlike the last cut in January, referred to by BOC Governor Stephen Poloz as life-saving surgery for the economy, this time around banks and consumers alike haven’t been caught unaware. You owe it to your customers to find the best possible rate for their specific set of circumstances. Borrowing from a bank that hasn’t adopted the BOC’s diminished rate is not only irresponsible, it’s unethical. Your client will eventually wonder why they’re paying a higher rate than the family down the street who bought their house at the same time.
So take advantage of the lowered rate, but make sure you’ve got a plan for the future.
It’s just prudent business.