Canada’s Record-Low Prime Rate

June 22, 2020

The prime rate refers to the lowest rate of interest at which money may be borrowed commercially – in Canada, it is influenced by the Bank of Canada to “promote the economic and financial welfare of Canada.” The BoC will adjust its targets to keep the economy healthy and affect peoples spending habits. For example, they may raise the prime rate to keep price inflation down and discourage people from spending. When the economy is weakening, or if inflation slows too much, the bank will lower the prime rate to encourage spending and stimulate the economy. Lower interest rates mean people can afford larger purchases (like homes) or can increase their spending power through lines of credit or credit cards. In the case of the COVID-19 pandemic, the under stimulated economy has cause banks to lower their prime rate to 2.45% as an emergency measure – this is the lowest it has been since the 2008 financial crisis.

So, what does all this mean for you? The prime rate affects loans with variable-rate interest, such as certain mortgages, car loans, Home Equity Lines of Credit (HELOCs), and credit cards with variable APR. If you already have a loan that is affected by the prime rate, then your interest payments will be lower for the time being. Additionally, banks may offer a better deal on new fixed-rate loans.

With the prime rate being so low, now may be a great time to consider a new investment, such as a house. If you’ve never bought a house before, you can take advantage of these Canadian incentives for first-time homebuyers:

The First-Time Home Buyer Incentive is for first-time homebuyers who have the minimum down payment for an insured mortgage. Approved applicants can receive up to 10% of the homes purchase price to put toward a down payment.

The Home Buyers’ Amount is a $5,000 non-refundable income tax credit on a qualifying home acquired during the year.

The Home Buyers’ Plan allows you to withdraw up to $35,000 from your RRSP to buy or build a qualifying home. If you are purchasing with your spouse or partner, you can both take advantage of this option for the full amount.

The GST/HST New Housing Rebate allows you to recover a portion of the GST or HST that you paid on the purchase price or cost of building your new house, substantially renovating your house, or conversion of a non-residential property into a house.

If this isn’t your first house, you could also look at refinancing your mortgage. You may have to pay a penalty for breaking your old mortgage (unless you happen to be at the end of your mortgage term anyway), but this move could make a huge difference if you, like many Canadians, are struggling to pay your bills. If you’ve fallen behind in making your minimum payments, this can also help protect your credit score.

There are other options for new investments – you could consider an investment loan, where you use loan funds to invest and make interest-only payments to keep the account open. Whatever the investment accrues above and beyond the loan amount is yours to keep. Bear in mind that this is an advanced strategy which requires credit checks and should be discussed with a financial advisor who can assess whether this strategy may work for you and can facilitate the application process.

If you are already investing, your financial advisor may suggest some adjustments to your current portfolio to make the most of this situation. For the most part, you should always stick with your long-term investment plan and talk to your advisor if you have any concerns. Our qualified financial planners are always available to answer questions about investing; e-mail to get started.

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