The Bank of Canada’s (the bank) move to cut its overnight rate to 2.25% from 2.5% on Wednesday will see an almost immediate drop in variable mortgage rates but also signals its concerns of the potential of a weaken economy.
“The bank opted to cut its benchmark rate again by 25 basis points, in response to soft labour market concerns and sluggish GDP over the medium-term. However, now that the effects of the prolonged trade war are becoming more clear, the bank now expects economic growth to remain sluggish for the second half of 2025, and to pick back up in 2026,” says Penelope Graham of Ratehub.ca.
“As a result of the rate cut, the overnight lending rate is now at a low not seen since Spring of 2022.”
“If lenders pass the full discount on to borrowers and leave their spreads to prime untouched, the lowest five-year variable mortgage rate could lower to 3.45%.
However, lenders are more likely to reduce these spreads when rates are trending lower. It is best for borrowers to get a pre-approval and rate hold as soon as possible to preserve current spreads to prime.”
Fixed mortgage rates decreased prior to the bank’s announcement, says Graham.
“Bond yields have hit lows not seen since April. The lowest five-year fixed term on Ratehub.ca is currently 3.79%, a low not seen since this spring,” she says.
“Fixed rates are likely to stay stable as bond markets had already priced in this recent rate cut, though are unlikely to fall much lower as the bank has indicated further cuts may be limited.”
Additionally, the rate cut will affect variable-rate personal loans, says Natasha Macmillan, senior business director of everyday banking at Ratehub.ca.
“When the Bank of Canada adjusts its policy rate, it triggers changes to the prime rate set by major banks. For Canadians with variable-rate personal loans, this means their interest costs will be impacted,” says Macmillan.
“If you have an existing variable-rate personal loan, your rate will adjust automatically. No action is needed to benefit from rate cuts, though you'll also see costs rise if rates increase."
"While you won't see dramatic month-to-month changes, the savings add up over your loan term. If you have a fixed-rate personal loan, your rate and payments remain unchanged.”
If considering a personal loan, potential borrowers have a number of factors to keep in mind.
“For those looking to secure a personal loan, now may be an opportune time if rates are declining,” says Macmillan.
“However, regardless of rate changes, borrowers should evaluate several key factors, including credit score, loan amount, term, and whether the monthly payment fits comfortably within their budget. It's also crucial to compare lenders, as rates vary significantly across banks, credit unions and online lenders.”
“It's also important to compare both fixed and variable options to determine which aligns with your risk tolerance and timeline. Variable rates offer flexibility but come with uncertainty, while fixed rates provide payment certainty.”
There is a downside for some Canadians, says Graham.
“Canadian savers and those with passive investments such as GICs, will see their rate of return lower after the rate cut,” she says.
“However, from a historical perspective, these rates are still competitive and provide a good option for those seeking stability in volatile market conditions."
The bottom line is the bank is unlikely to make another cut at its next announcement on Dec. 10, says Graham.
“Notably, the bank has indicated that it expects the current policy rate to be sufficient to support the economy for the foreseeable future, without putting pressure on inflation,” she says.
“A rate of 2.25% is officially at the lower end of what the bank considers neutral. Unless economic conditions change for the worse, borrowers can expect rates to hold at their current levels for the time being.”
