On July 15th the Bank of Canada cut the overnight lending rate by .5%. It is anticipated that the rest of the Canadian financial institutions will likely follow suit, making consumer debt more affordable. A direct result of this should be a change in mortgage and lending rates.

The Bank of Canada changing its rates has no direct impact on consumers. The direct impact comes when financial institutions change their interest rate. Since the reduction, TD Canada Trust announced a drop in their prime lending rate by 10 basis points to 2.75%. New rates are expected within the next few weeks from the other major institutions.

What does this mean when you are buying a new home?

Consumers looking at  variable rate mortgages can expect an immediate reduction in rates. Consumers with fixed rate mortgages will see no change. Those that would like a fixed rate mortgage, but do not yet have one, should see the fixed rate will drop slightly, but remain higher than the variable rate alternative.

If you already have a mortgage, now is a good time to renegotiate your rate. A .25% decrease in your rate can save you about

$700 a year.*

The big picture:

This means debt is more affordable so it may cost consumers less to buy a house. As a result, more buyers may enter the market, having the effect of driving housing prices up. So, while your mortgage may cost less, the listed price of your house may cost more.

As a consumer, the best thing you can do when buying a house is shop around for your mortgage with the same diligence and care used when selecting your home. Many home builders work with specific banks and brokers but that might not be your best option.  Not all banks have the same rates and terms, and small differences in these can mean big savings or big costs.

The Bank of Canada's rate drop is consistent with a trend of economic weakening across the country. This will likely have a small impact on the housing market.

What are the main factors that influence the type or mortgage you choose? Will the change in interest rates be the catalyst in your decision to buy a new home?

*Example calculated using RBC’s mortgage calculator, based on a $440,000 mortgage at 2.5% and 2.75% on a 30 year term with bi-weekly payments.