What Bank of Canada Rate Cut Means For Investors?
The Bank of Canada (BoC) meets eight times a year to decide whether the key policy interest rate needs to be adjusted or needs to be kept stagnant. When the BoC feels that inflation is under control and monetary policy is overly restrictive, it usually lowers the policy interest rate. On 29 January, the BoC announced 25 bps rate cut to bring that policy rate down to 3%. Reducing interest rates discourages saving and promotes spending by both individuals and corporations, which boosts economic expansion.
For people who hold a large amount of cash and cash equivalents, such as money market funds, high interest savings accounts, and Guaranteed Investment Certificates (GICs), a central bank rate drop is of no benefit.
When interest rates are lowered, borrowers will receive lower rates on GICs and MICs and earn less interest on deposits made into interest bearing accounts.
How Interest Rate Cut Benefit Mortgage Investors?
Investors exposed to the bond and equities markets may profit from a central bank rate drop. People who have fixed income and equity securities as the main components of their investing portfolio may also benefit from the rate cut.
Those investing in mortgage investment corporations in British Columbia can benefit from higher returns. Since investors will profit from lower borrowing costs, an interest rate drop supports equities markets.
Profit margins will also be maintained by the rise in economic activity. Mortgage pool investors can also gain since new bonds will be issued at reduced rates, which will increase the appeal of existing bonds with higher rates and raise their price. Although a decline in the Bank of Canada rate indicates that the economy requires assistance, financial markets are optimistic and typically respond favorably to such circumstances.
Benefit in Terms of Debt Reduction
In general, a central bank rate drop is excellent news for people who have variable-rate debt, such as a line of credit. When central banks alter the policy interest rate, variable rate debt is linked to a bank’s prime lending rate, which is modified accordingly.
A reduction in interest rates may or may not affect your payment, but it should affect the percentage of your payment that goes toward the principle balance, thereby allowing you to pay off your debt sooner.
The Bank of Canada rate drop may also be advantageous for anyone wishing to finance a new mortgage or renew an existing one. The yields on Government of Canada bonds have a positive correlation with mortgage rates. Bond yields and mortgage rates typically decline in tandem with declining interest rates.
Gain from Low Policy Rate with Versa Platinum
Want to make the most of the latest 3% overnight rate? Invest in Versa Platinum’s mortgage pool in Abbotsford and become a shareholder. Our mortgage investment company in British Columbia is committed to help eligible investors in earning consistently high profits by making an initial investment of just $10,000. We are here to diversify your portfolio and help you grow your wealth. For more details about our MIC, feel free to give us a call.
