Bank of Canada’s Overnight Rate Remains Unchanged. What’s that, and how does this affect Mortgages?

Yesterday the Bank of Canada (BoC) held their key overnight rate at ½ percent a rate has remained unchanged for years now. Something that hasn’t changed in years, yet makes big news with each announcement begs the question, ‘what is the overnight rate and what’s all the big fuss about?’

The BoC is Canada’s central bank carries out the country’s monetary policy by influencing short-term interest rates. This is controlled by raising and lowering the overnight rate. The overnight rate is the interest rate at which our banks and other major financial institutions borrow and lend one-day (‘or overnight’) money amongst themselves. Any changes to overnight rate influences other interest rates in our economy, including consumer loans, mortgages and can also affect the exchange rate of our Canadian dollar.

If our financial institutions are borrowing one-day funds at 0.5%, they can re-lend that money out in the form of mortgages to consumers like us at a higher rate (one of many investment instruments, but let’s focus here for today). Now if the overnight rate can change, up and down, how do our financial institutions ensure that their mortgages stay profitable? By offering VARIABLE MORTGAGES! This way if the overnight rate increases, they can increase the rate on their variable mortgages, and (hopefully) vice-versa when the overnight rate decreases.

 BOC Historical Rates over the Last 10 Years

The BoC holds their announcement 8 times a year, with their next announcement scheduled for May 24th, 2017. So the next time you hear about it in the news, you’ll know what all the fuss is about. Thanks! Until next time. If you have any questions about the BoC, or your Real Estate and Mortgage Financing needs, feel free to ask in the comments below, or email me directly at jason@hughproperty.com.

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