RBC Royal Bank's Prime Rate Cut: A Boost for Homeowners and the Economy

TORONTO, Jan. 29, 2025 /CNW/ - RBC Royal Bank has announced a decrease in its prime rate by 25 basis points, from 5.45% to 5.20%, effective January 30, 2025. This move is expected to have a positive impact on both new and existing homeowners, as well as the broader economy. Let's explore the implications of this change.

Impact on Homeowners

The prime rate is the benchmark for variable-rate mortgages, and a decrease in the prime rate typically leads to lower interest rates for these mortgages. This change will have a positive impact on the affordability of mortgages for both new and existing homeowners.

1. New homeowners (first-time buyers): Lower interest rates mean that first-time homebuyers will have more purchasing power, as they will be able to afford higher mortgage amounts with the same monthly payments. This increased affordability can help more people enter the housing market. For example, a homeowner with a $650,000 mortgage at a 5% interest rate and 25-year amortization would have a monthly payment of $3,780.44. At a 5.20% interest rate, this monthly payment would decrease to approximately $3,720.50, making homeownership more affordable.
2. Existing homeowners (variable-rate mortgages): Homeowners with variable-rate mortgages will see a decrease in their monthly payments, as the interest rate on their mortgage will be lower. This can free up additional income for other expenses or savings. For instance, a homeowner with a $650,000 mortgage at a 5.45% interest rate and 25-year amortization would have a monthly payment of $3,824.55. With the new prime rate, their monthly payment would decrease to approximately $3,764.66.
3. Mortgage renewers: While the interest rate reduction is positive news, homeowners renewing their fixed-rate mortgages in the coming months will still feel the impact of higher rates compared to their current mortgage term. For example, a homeowner who took out a mortgage in 2022 at a 2% interest rate would see their rate increase significantly if they renew at today's higher rates. To budget accordingly, homeowners can use RBC's Mortgage Payment Calculator to estimate their future payments using today's rates.



Impact on the Housing Market

The decrease in the prime rate by RBC Royal Bank could have several implications on the housing market:

1. Demand: Lower interest rates make borrowing cheaper, which could increase demand for housing, particularly from first-time homebuyers and those looking to refinance their mortgages. The reduction in interest rates may also boost consumer confidence, leading to increased housing demand.
2. Supply: The decrease in interest rates may encourage homeowners to add units to their existing properties, as they can now refinance their mortgages with an insured mortgage to add more living units, with insurance for up to $2 million in property value after redevelopment. This change could help ease the crunch on housing supply, particularly in urban areas where demand is high.
3. Pricing: Increased demand, coupled with a potential increase in supply, could lead to a moderate pick-up in housing prices. However, continued high demand and limitations on available land, zoning restrictions, and a lack of skilled labor could slow the pace of new builds, potentially outpacing increases in supply and putting upward pressure on housing prices.

Impact on the Broader Economy

The announcement by RBC Royal Bank of a 25 basis point decrease in its prime rate is likely to have several impacts on the broader economy:

1. Consumer Spending: Lower interest rates make borrowing cheaper for consumers, which can boost consumer confidence and encourage spending. This is particularly relevant for those with variable rate mortgages or lines of credit. For instance, a homeowner with a $300,000 variable rate mortgage at the previous prime rate of 5.45% would have a monthly payment of approximately $1,735. With the new prime rate of 5.20%, the monthly payment would decrease to around $1,685, freeing up extra cash for discretionary spending. This can stimulate consumer spending, which accounts for about 56% of Canada's GDP (Gross Domestic Product).
2. Business Investment: Lower interest rates can also encourage businesses to invest in expansion or new projects, as the cost of borrowing decreases. This can lead to increased capital expenditure, which can drive economic growth. For example, a business looking to expand its operations might find it more affordable to take out a loan to finance the project with a lower interest rate. This can lead to increased hiring, production, and ultimately, economic growth.
3. Overall Economic Growth: Lower interest rates can contribute to overall economic growth by encouraging both consumer spending and business investment. According to the Bank of Canada's Monetary Policy Report, a decrease in interest rates can lead to an increase in GDP. For instance, in the report released in October 2024, the Bank of Canada projected that a decrease in the policy interest rate would lead to an increase in real GDP of 0.2% by the end of 2025.

In conclusion, the decrease in the prime rate by RBC Royal Bank is likely to have a positive impact on the broader economy by stimulating consumer spending, encouraging business investment, and contributing to overall economic growth. However, the extent of these impacts will depend on various factors, including the response of other banks and the overall economic conditions.