By the numbers: How a Bank of Canada rate cut affects mortgages and other debt payments

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Many borrowers eagerly waiting on the Bank of Canada to start lowering interest rates will likely see savings of less than $100 after the first cut, according to a Globe and Mail analysis of common financial scenarios.

The Globe considered average home prices and borrowing situations for floating-rate mortgages, home equity lines of credit (HELOCs) and other lines of credit and found that, in most cases, the savings after an anticipated quarter-of-a-percentage-point rate cut were very modest.

“It’s a little bit of help, but it’s not going to have that much of a material difference in terms of their ability to make the payments or, if you’re hoping to buy your first home, get your foot on the ladder,” said Rebecca Oakes, vice-president of advanced analytics at Equifax Canada.

For Canadians contemplating taking out a mortgage or other debt with fixed interest rates, which remain constant throughout the loan term, any impact will depend on whether and how the central bank’s decision on Wednesday affects investors’ expectations, said James Laird, co-chief executive of financial products comparisons site Ratehub.ca and president of mortgage lender CanWise.

Among borrowers with floating rates are those with adjustable-rate mortgages, for whom an interest-rate reduction would translate almost immediately into lower payments. For those with variable-rate mortgages, instalment amounts usually remain the same until the end of the loan term, but lower rates mean more of the payment is applied to the principal rather than the interest part of the mortgage, which reduces the amount owing more quickly.

Floating-rate debt also includes unsecured and secured lines of credit, such as HELOCs. Some auto loans also have floating rates.

Here’s the effect a rate cut would have in different scenarios.

Consider a homeowner with an adjustable five-year mortgage rate of 5.95 per cent – the lowest nationally available, according to Ratehub – and a mortgage balance of $328,000, which is an average based on data from the Canada Mortgage and Housing Corp. (CMHC).

This borrower would see their $2,170 mortgage payment decline by $47 a month after a Bank of Canada cut, assuming they still have 23 years to fully pay off their mortgage, according to calculations by Ratehub.

Next, picture a first-time homebuyer ready to purchase a home worth $703,446 – the average home price in Canada as of April – with a 10-per-cent down payment and a variable-rate mortgage. A 5.95-per-cent interest rate would work out to a monthly payment of $4,157, including the cost of mortgage default insurance, which is mandatory with down payments of less than 20 per cent.

If this buyer waited and bought the home after a rate cut with a variable rate of 5.7 per cent, their monthly payment would be $96 lower, Ratehub calculations show.

Now imagine a homeowner who must pay off $101,482 on their HELOC, equal to the average amount owed on those credit vehicles among borrowers who carry a balance, according to Equifax. Assuming an interest rate of 7.7 per cent, this borrower would see their $651-a-month minimum payment shrink by $21, The Globe calculated. (And the minimum payment would only cover the interest on the line of credit, without reducing the principal amount owed.)

For borrowers with smaller debts, the savings would be even tinier. Take someone owing $11,790 on a personal line of credit, equal to the average amount outstanding on unsecured lines of credit that carry a balance, according to Equifax. Assuming an initial interest rate of 8.2 per cent, their minimum payment would shrink by just $2.46 a month, Globe calculations show.

Canadians with auto loans owe an average of $19,959, according to Equifax, which means those with floating rates would also likely see very small reductions in their debt payments.

For those planning to take out or renew a mortgage with a fixed interest rate, Wednesday’s rate announcement will likely matter only if the Bank of Canada surprises financial markets, Mr. Laird said.

That’s because lenders adjust the fixed rates they offer to new borrowers based on rates of return on bonds, which are influenced by the expectations about the trajectory of the central bank’s key rate.

Investors have already priced in a rate cut in June or July, Mr. Laird said. The key is what the central bank says about the rate decision.

If the Bank of Canada were to sound more timid about the pace or extent of future rate cuts than the consensus expectation, fixed mortgage rates could go up, he added. The opposite holds if the central bank were to appear more aggressive than expected on the timetable or overall magnitude of the cuts.

“The words are what’s going to matter,” he said.