With the recent news of the COVID-19 outbreak in Toronto, and most of the city under quarantine, its no surprise that the Bank of Canada is already beginning to take action. In an effort to combat a slowdown in the housing industry, the BoC, in a historic move, decided to drop the Overnight Rate to 0.75%. If you haven’t purchased a home before, or simply trusted your financial adviser to get the best rate, you may be confused how this rate could help the Toronto Real Estate market.
Here’s a brief overview of the overnight rate and how it directly affects the Real Estate and mortgage industry in Canada.
What is the Overnight Rate?
The Bank of Canada’s Overnight Rate, also referred to as the Policy Interest Rate, is the interest rate at which Banks lend between themselves. This rate can directly affect posted rates of mortgages, consumer loans, and can also affect the price of the Canadian Dollar. A lower overnight rate can make the borrowing of funds more affordable. This provides incentive for consumers and can stimulate the economy.
When does the Overnight Rate Change?
The Bank of Canada sets 8 dates during the year on which to announce a change to the overnight rate, if any. During this time, a report is typically issued justifying the change in rate and giving a clear picture of the current health of the Canadian Economy. In extreme circumstances, the Bank of Canada can issue emergency rate changes, in an effort to weaken the blow of an economic slowdown caused by a pandemic.
Does the Overnight Rate Affect Mortgage Rates?
A lower overnight rate can usually cause mortgage rates in Canada to fall. However, in circumstances where banks crave liquidity, the overnight rate can have little to no effect on mortgage rates in Canada. In fact, with the recent COVID-19 outbreak, rates have risen slightly in an effort to account for the risk of lending money to those who are facing the potential of lost income. An overnight rate allows easier ‘settling of account’ for the bank, inciting the borrowing and exchange of money between the financial institutions. This does not always affect consumers looking to borrow money long-term from a bank.
Have a question about the Overnight rate and how it might affect your home purchasing or selling goals? Contact ReaLawState today to get your questions answered by an Agent and a Lawyer.