Bank of Canada cuts interest rate to lowest level practically possible

OTTAWA - The Bank of Canada says the recession is far worse than it previously thought and has slashed its overnight interest rate to the lowest practical point, to 0.25 per cent.

The central bank says it will likely have to keep the trend-setting rate at that floor until mid-2010 in order to try to lift the economy out of its slump.

The bank's decision was not unexpected, but the considerably darker view of the economic situation it presented along with Tuesday's bank rate cut was a surprise.

The central bank now says the economy will shrink by a massive three per cent this year, almost three times as much as the 1.2 per cent it forecast as early as last January.

And it says the economy won't rebound nearly as strongly as it thought, saying any recovery won't start until the fourth quarter and growth next year will be more muted, at 2.5 per cent instead of the 3.8 per cent previously expected.

BMO just announced it is dropping its prime rate 1/4%, in line with the Bank of Canada.

BMO was the first big bank to move today. Their statement was issued at 9:01am ET, just one minute after the Bank of Canada’s announcement.

The rest of the five major banks are expected to follow.

BMO said that it’s closed variable-rate mortgage will now be priced at 3.05% (prime + 0.80%).

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Walmart Pricing vs. Mortgage Pricing

If you walk down any aisle at Walmart you’ll see a lot of products priced at $4.99, $9.99, $19.99, and so on. When it comes to choosing between purchases, people instinctively gravitate to prices with lower leading digits.

Not surprisingly, it’s no different in the mortgage world. At the moment, for example, there’s no shortage of 5-year fixed rates at 3.99%. Lots of non-bank lenders now seem to be congregating there, like a herd of buffalo waiting for the next buffalo to run.

There’s no magic to 3.99%. It’s not based on any specific cost of funds formula. It’s simply a number that makes people say “Wow, under 4% for a 5-year mortgage sounds great!”

As such, don’t expect to see a lot of 4.00% mortgage offers out there. If you do see another mortgage that’s 0.01%-0.02% more expensive, forget the psychology. Compare that mortgage’s features with the alternatives. A 0.01% discount saves the average borrower just $60.58 over five years (given the average Canadian mortgage of $127,000, a 25-year , etc.). Yet, feature differences or little quirks in pre-payments, penalty calculation, fees, rate holds, amortization etc. can cost you FAR FAR more. In the mortgage business, looking at the forest instead of the trees can be quite fruitful indeed.

For More Information on Current and Future Product Information
Please feel free to contact
Newmark Mortgages and Financial Services

1-888-530-3024

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