Maclin Crawford

The Bank of Canada surprised financial markets bycutting its key interest rateby 0.25 per cent on Wednesday. Here are five ways the central banks move will affectCanadian consumers: 1. Cheaper mortgages for some, but not all This is good news if youre a variable-rate mortgage holder, said Penelope Graham, editor at RateSupermarket.ca. Variable-rate mortgages are determinedby the prime interest rate, which is in turn linked tothe overnight interest rate the Bank of Canada just lowered. It remains to be seen just how much [the banks] are going to cut the prime rate, but it will be cut, said Graham. As of Thursday morning, none of the big banks had trimmed their prime rates. TD Bank said Thursdayithad decided not to cut its prime rate, a decision that was carefully considered and is based on a number of factors, with the Bank of Canadas overnight rate only being one of them.Royal Bank of Canada said it is considering the impact of the central banks rate cut, but is not changing its mortgage products at this time. Scotiabank told CBC Newsit had not yet made a decision on whetherto cut its prime rate. Our decision regarding our prime rate is impacted by factors beyond just the Bank of Canadas overnight rate, said MohammedNakhooda, a spokesman for TD Bank. Not only do we operate in a competitive environment, but our prime rate is influenced by the broader economic environment, and its impact on credit. Holders of fixed-rate mortgages, of course, wont enjoy an immediate cut in monthly payments. Canadians taking out a new fixed-rate mortgage or renewing their old one right now could see rates edge down. Fixed mortgage rates are linked to long-term government bond yields. Those bondyields have already begun to fall in light of the Bank of Canadas interest rate cut.​ Graham warned Canadian home buyers that what goes down, must come up. When rates do eventually go up, when the economy recovers, [mortgageholders] are going to see their monthly debt servicing costs go up, said Graham. If they cant handle that, they could see themselves underwater on their mortgages. 2. Borrowing on lines of credit, credit cards Like variable-ratemortgages, interest rates for lines of credit are generally tied to a banks prime interest rate, which is usuallytied to the Bank of Canadas overnight rate. That means Canadians borrowing money througha line of credit maysee their borrowing costs to come down,depending on whether their bank cuts its prime interest rate. Canadians hoping for a break on their credit card bills, though, are out of luck. Your credit card interest [rate] is actually a stated amount, explained Craig Alexander, chief economist at TD Bank. So when the Bank of Canada cuts rates or raises rates it doesnt have an influence on them. As with mortgages, Canadians shouldnt necessarily take further advantage of cheaper borrowing costs just because they can. CIBC deputy chief economist Benjamin Tal sees a potential risk to the Canadian economy if Canadians start racking up even more debt.A credit-fuelled spending spree is something that the Bank of Canada would like to avoid, saidTal. Our debt-to-income ratio, at 165 per cent, is relatively high, said Tal. Thats a risk that the Bank of Canada is taking. 3. The loonie flies south The Canadian dollar fell dramatically against a variety of major currencies as soon as the Bank of Canada made its announcement, and that means Canadians immediately have lesspurchasing power abroad. Thats bad news for snowbirds with homesin the U.S., or any Canadian planning an international trip. If Canadians are wondering when to transfer money to a foreign bank account, they can try to take advantage of short-term volatility inexchange rates, according toKarlSchamotta, director of foreign exchange research at CambridgeMercantile Group. Typically exchange rates do not follow a nice linear trend, saidSchamotta.Theres certainly potential to harness any gains that might occur over the coming months, but at the same time its very important to look at that overall backdrop and understand that the Canadian dollar is likely to remain depressed for a long period of time. How long could thelooniefly so low?Schamottasees a clue inthe Bank of Canadas own outlook, which says lower oil prices will have an unambiguously negative effect on the Canadian economy for 2015 and beyond. What were looking at here is a relatively bearish outlook for interest rates and for growth in Canada for at least a one- to two-year period here, and that is likely to keep the Canadian dollar contained, saidSchamotta. That negative outlook could turn more positive, addedSchamotta, if some kind of geopolitical shock causes oil prices to surge once again. 4. No immediate effect on auto loans Auto loans tend to be fixed-rate, not variable-rate. That means the Bank of Canadas interest rate cut wont have an immediate effect on auto financing, according to Canadian Auto Dealers Association chief economist Michael Hatch. I dont think that tomorrowautomotive consumers are going to wake up necessarily to easier or harder financing conditions, said Hatch. Its going to remain par for the course. Still, Hatch didnt rule out cheaper auto financing in the near future.Its a very competitive [interest rate]environment out there.It could well happen in the next few months, going into the spring selling season. 5. A bad time for savers If you enjoy interest generated from a traditional savings account, the Bank of Canadas move isbad news for those returns. We saw when the Bank of Canada cut interest rates during the last recession that interest rates on savings accounts went down almost linearly with the decline in the Bank of Canada overnight rate, said Randall Bartlett, senior economist at TD Economics. Theres not going to be a massive change, but at the same time ifyoure notearning much interest before, youre going to be earning less interest now, added Bartlett. This could be a good time for savers to think about changing their strategy, said Bartlett. As interest on things like savings accountsand government debt comes down, at the same time it does provide incentives for people to invest in other types of assets that have higherreturns, said Bartlett. Things like stocks, ETFs, mutual funds tend to benefit from rate cuts as businesses take advantage of cheaper credit to make investments that could improve their share prices down the line.