On March 12, 2025, the Bank of Canada reduced its benchmark interest rate by 0.25%, bringing it down to 2.75%. This decision has led many Canadian banks, including the National Bank of Canada, to lower their prime lending rates to 4.95%.
Impact on Variable-Rate Mortgages
Variable-rate mortgages are directly influenced by changes in the prime rate. When the prime rate decreases, the interest rate on these mortgages typically follows suit, leading to reduced interest costs for borrowers. Consequently, a larger portion of each payment goes toward the principal balance, potentially shortening the amortization period.
In contrast, fixed-rate mortgages are set for a specific term and are not immediately affected by changes in the prime rate. These rates are more closely tied to bond market movements and remain constant throughout the fixed term.
Reduction in Payments per $100,000 of Mortgage
A 0.25% reduction in the prime rate can lead to noticeable savings for variable-rate mortgage holders. For every $100,000 of mortgage balance, the monthly payment decrease can be calculated approximately as follows:
Previous Interest Rate: Assuming an initial rate of 5.20%
New Interest Rate: Reduced to 4.95%
Amortization Period: 25 years
Using these figures, the monthly payment reduction is approximately $14 per $100,000 of mortgage balance. This means that for a mortgage of $300,000, the monthly savings would be around $42.
How to Take Advantage of the Prime Rate Reduction
Maintain Your Current Payment Amount: Instead of reducing your monthly payments, consider continuing to pay the previous amount. This approach allows more funds to be applied toward the principal, helping you pay off your mortgage faster and reducing overall interest costs.
Explore Lump-Sum Payments: If your mortgage terms permit, making additional lump-sum payments can further decrease your principal balance. This strategy can lead to significant interest savings over time.
Consult Your Mortgage Advisor: Discuss with your mortgage professional the potential benefits of refinancing or adjusting your mortgage strategy in light of the recent rate change. They can provide personalized advice tailored to your financial goals.
Review Other Variable-Rate Products: Beyond mortgages, other financial products like lines of credit and certain loans tied to the prime rate may also see reduced interest costs. Assess these accounts to identify additional savings opportunities.
By staying informed and proactively managing your mortgage in response to prime rate changes, you can optimize your financial strategy and achieve your homeownership goals more efficiently.
Contact The Mortgage Missus Inc. today to learn more!
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Tonia Mercer | The Mortgage Missus Inc.
About the author,
Tonia Mercer is an independent mortgage broker. She has been in the industry for 17 years, in 2021 she launched her own brokerage The Mortgage Missus Inc.
Tonia is passionate about financial education and believes that working with independent experts is the best way to get unbiased, professional advice. She has joined forces with local independent home and auto, financial advisor, legal, appraiser and real estate service providers. Effectively creating a concierge service for all things financial and real estate.
Tonia donates a portion of all mortgage revenue to Mercer's Mission, a street dog and cat feeding mission in the Dominican Republic. https://www.facebook.com/mercersmission
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