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Consumer loans could become even cheaper:

TORONTO — The Bank of Canada’s decision to lower its overnight lending rate is expected to send consumer interest rates even lower.
Consumers with variable rate mortgages tied to prime will reap immediate benefits from the move as banks lower their rates to match the central bank reduction. Toronto-Dominion Bank was the first to cut its prime lending rate, slicing off 10 basis points to 2.75 per cent. Later Wednesday, Royal Bank of Canada and Bank of Montreal followed, shaving their prime lending rates by 15 basis points to 2.70 per cent.
Bank of Nova Scotia and Canadian Imperial Bank of Commerce followed with their own cuts late Wednesday, shaving off 15 basis points to their prime lending rates. That leaves four of the banks with a prime rate of 2.70 per cent, while TD is the lone outlier with a 2.75 per cent rate.
With discounting, consumers with floating-rate debt are now borrowing at less than two per cent, but even fixed rate loans for as long as five years are now below 2.5%. Rob McLister, founder of ratespy.com, said he can see long-term rates dropping below two per cent if the Bank of Canada lowers its overnight lending rate again this year.
“You want to talk about the Bank of Canada stoking the housing market? You ain’t seen nothing yet,” he said.
The worry among some in the industry is that consumers will ratchet up their debt as their carrying costs drop. Average Canadian household debt-to-disposable income hit a record 163.6 at the end of 2014 and has held steady since.
Consumers have been increasing their debt loads, using home equity lines of credit (HELOC) to pay for everything from automobiles to vacations to renovations.
A report this week from Altus Group found renovation spending hit a record high of $68 billion in 2014. About 20 per cent of debt in HELOCs funded those renovations, the real estate company said. HELOCs are directly tied to prime in most cases, so those consumers will have even more reason to borrow.
nancial institutions may be under pressure to cut prime further. Prime normally tracks the Bank of Canada’s lending rate, but in March when the central bank lowered rates by 25 basis points, lenders only lowered their prime rate by 15 basis points.
Even if other banks match, that will still mean the central bank has cut its lending rate by 50 basis points over the past four months and the banks have passed on only half the savings.
“I’m sure some consumer groups will be up in arms,” said McLister.The prime rate immediately affects only consumers with a variable rate tied to prime, which is about 25-30 per cent of the market, according to the Canadian Association of Accredited Mortgage Professionals.
CAAMP’s chief economist Will Dunning says rates are so low already he almost wonders whether a cut at this point can make much of a difference in the minds of most consumers.
“People have to be assuming we are at the bottom now,” said Dunning. “I think there will be a very small number of people impacted by this in the housing market.”
Phil Soper, chief executive of Royal LePage Real Estate Services, thinks the cuts will continue to boost the housing market in Vancouver and Toronto, where the average price of detached homes has soared past $1 million.
“We already have a supply-demand imbalance so we are going to have more demand. This will put upward pressure on prices. That was the case for holding off on a rate cut from a housing perspective,” said Soper, who had publicly called on the Bank of Canada not to change rates.

Garry Marr