What the Bank of Canada’s Interest Rate Cut Means for Your Debt

What the Bank of Canada’s Interest Rate Cut Means for Your Debt

The Bank of Canada’s January 2025 announcement lowered the key interest rate by 0.25%, bringing it down to 3.00%.

Lower rates can reduce interest expenses on mortgages, lines of credit, and other loans, helping to free up much-needed cash flow for Canadians. However, they also make taking on more debt easier—which could become problematic if financial circumstances change.

Given potential economic shifts, including possible trade disruptions, now is a good time to reassess your financial situation. Ensuring your debt repayment and savings plans remain manageable amid future uncertainties is imperative. 

Consulting with a Licensed Insolvency Trustee can provide valuable insight in building a sustainable financial plan and debt relief solutions. 

The current Bank Rate is at 3.00% and the deposit rate is at 2.95%

Bank Rate Changes Since 2010 Target Overnight Rate Change
May 31st, 2010 0.50% 0.25
July 19, 2010 0.75% 0.25
September 7, 2010 1% 0.25
January 20, 2015 0.75% -0.25
July 14, 2015 0.50% -0.25
July 11, 2017 0.75% 0.25
September 5, 2017 1% 0.25
January 16, 2018 1.25% 0.25
July 10, 2018 1.50% 0.25
October 23, 2018 1.75% 0.25
March 3, 2020 1.25% -0.50
March 15, 2020 0.75% -0.50
March 26, 2020 0.25% -0.50
March 2, 2022 0.50% 0.25
April 13, 2022 1.00% 0.50
June 1, 2022 1.50% 0.50
July 13, 2022 2.50% 1.00
September 7, 2022 3.25% 0.75
October 26, 2022 3.75% 0.50
December 7, 2022 4.25% 0.50
January 25, 2023 4.50% 0.25
June 7, 2023 4.75% 0.25
July 12, 2023 5.00% 0.25
June 5, 2024 4.75% -0.25
September 4, 2024 4.25% -0.25
October 23, 2024 3¾% -0.50
December 11, 2024 3½% -0.50
January 29, 2025 3.00% -0.25

When the Bank of Canada lowers rates, banks and mortgage lenders usually follow with reduced borrowing costs. Here’s what a 25-basis point drop can do for a mortgage.

If you have a $400,000 mortgage, amortized over 25 years, at 2.59%, your monthly payment is $1,810. A reduction to 2.34% would bring your payment down to $1,760.

That’s a $50 decrease each month.

Though the decrease is smaller than the impact of an increase, over time, this savings adds up. A reduced monthly payment can free up cash flow, giving you some breathing room or more room for savings (so- don’t take on more debt!) 

In the long run, lower interest rates can also reduce the total interest you pay over the life of your loan. 

How much does a 25-basis point increase in interest rates cost?

Every time the Bank of Canada raises rates, banks and mortgage companies follow with increased mortgage rates. Here is the impact of a 25-point increase on a small mortgage.

If you have a $400,000 mortgage, amortized over 25 years, at 2.59%, your monthly mortgage payment would be $1,810 per month.

That same $400,000 mortgage at 2.84% would cost you $1,860 per month.

That’s an increase in your monthly mortgage payment of $50 a month.

Multiply this by the 5 rate increases some economists are predicting, and you are facing a possible increase in your mortgage payment of $250 a month.

With so many Canadians living paycheque to paycheque, this is going to be a shock. Yet, we shouldn’t be surprised.

In 2012, I was interviewed on CBC Radio’s The Current, on a segment about Doubting Personal Debt and we discussed, even way back then, that debt is a “ticking time bomb”.  Back then I warned that low interest rates were making our debt artificially ‘affordable’.  I made the comment that we could be in trouble if interest rates rise.

And on the same day in October 2018 as the Bank of Canada increased rates to the highest since December 2008, I was once again on CBC Radio’s The Current to talk about Canadian debt as part of a special they were calling Debt Nation.

When facing a rising rate environment, you need to consider what an increase in interest rates will do to your personal cash flow.

For many years the best decision a Canadian could make was to get a variable rate mortgage (not a fixed rate), because the rate was lower. That’s great, but a variable rate, obviously, is variable, so it can go down, but it can also go up.

Today you may be paying 3% on your variable rate mortgage, so on a $200,000 mortgage amortized over 25 years you are making a monthly payment of $946.40. What happens if your variable interest rate were to increase by 1%? Again, you may not think 1% is a big number, but a 4% interest rate on your $200,000 mortgage amortized over 25 years would cost you $1,052.04 per month. Can you afford to pay an extra $105.55 per month on your mortgage? Will your after-tax paycheque be increasing by $105 per month this year? If not, higher interest rates will squeeze your budget.

Here’s where most people miss the point: going from a 3% to a 4% interest rate is not an increase of 1% in your payments. If your rent goes from $300 to $400 per month, how much did your rent increase? Answer: one third, or over 33%.

a one percent increase means a 33 percent increase in payments

That’s the point: if your interest rate increases by 1%, the actual interest cost of your mortgage in the example above increased by over 33%.

That’s a huge increase, and unless your pay will also be going up by 33%, higher interest rates will be a problem for your monthly cash flow.

Similar Posts:

  1. Homeowners Not Filing Insolvency Despite Rate Hikes – Why Not?
  2. How A Consumer Proposal can Improve Your Cashflow
  3. 2023 Debt Statistics and What It Means for Consumer Insolvencies
  4. Second Mortgage Home Equity Loan or Interest-Free Consumer Proposal?
  5. Minimum Payments on Credit Cards are Keeping You in Debt

Find an Office Near You

Offices throughout Toronto and Ontario

google logoHoyes, Michalos & Associates Inc.Hoyes, Michalos & Associates Inc.
4.9 Stars - Based on 2094 User Reviews
facebook logoHoyes, Michalos & Associates Inc.Hoyes, Michalos & Associates Inc.
4.8 Stars - Based on 63 User Reviews