Would it make things easier for consumers to obtain a loan at a cheaper rate? Well, it may happen. The Bank of Canada’s decision to lower its overnight lending rate is expected to send consumer interest rates even lower.
The banks are moving their variable rate for mortgages. Consumers with variable rate mortgages tied to prime will reap immediate benefits from the move as banks lower their rates to match the central bank reduction. Toronto-Dominion Bank was the first to cut its prime lending rate, slicing off 10 basis points to 2.75 per cent. Later Wednesday, Royal Bank of Canada and Bank of Montreal followed, shaving their prime lending rates by 15 basis points to 2.70 per cent.
Bank of Nova Scotia and Canadian Imperial Bank of Commerce followed with their own cuts late Wednesday, shaving off 15 basis points to their prime lending rates. That leaves four of the banks with a prime rate of 2.70 per cent, while TD is the lone outlier with a 2.75 per cent rate. All of these rates were effective yesterday.
The Bank of Canada’s cut its overnight lending rate Wednesday and once again the country’s financial institutions seem unlikely to pass on the full extent of the reduction to consumers.
With discounting, consumers with floating-rate debt are now borrowing at less than two per cent, but even fixed rate loans for as long as five years are now below 2.5%. Rob McLister, founder of ratespy.com, said he can see long-term rates dropping below two per cent if the Bank of Canada lowers its overnight lending rate again this year.
“You want to talk about the Bank of Canada stoking the housing market? You ain’t seen nothing yet,” according to his quote in the Toronto Sun.
The worry among some in the industry is that consumers will ratchet up their debt as their carrying costs drop. Average Canadian household debt-to-disposable income hit a record 163.6 at the end of 2014 and has held steady since.
Consumers have been increasing their debt loads, using home equity lines of credit (HELOC) to pay for everything from automobiles to vacations to renovations.
report this week from Altus Group found renovation spending hit a record high of $68 billion in 2014. About 20 per cent of debt in HELOCs funded those renovations, the real estate company said. HELOCs are directly tied to prime in most cases, so those consumers will have even more reason to borrow.
In our experience, people who usually need to borrow money generally don’t have the means to pay it back without accumulating a lot of interest. What do you think about this?
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