Bank of Canada rate decisions 2020: three rate cuts in 23 days

On February 28, 2020, the Bank of Canada's overnight rate sat at 1.75%. By March 27, three cuts later, two of them emergency unscheduled decisions, it was 0.25%, a move that took just 23 days from the first cut on March 4. Nothing like this had happened before. And nine months later, with the rate still pinned at that floor, the question every Ontario homeowner and buyer is now asking is straightforward: how long does this last?21

The March Rate Cuts: What Happened

The speed of the Bank of Canada's response in March 2020 was unprecedented. Here is the sequence:43

The March 4 cut was the scheduled announcement, and it was aggressive on its own: 50 basis points in a single move, double the typical increment. By March 13, with COVID-19 spreading rapidly and financial markets in freefall, the Bank took the extraordinary step of an unscheduled emergency cut. Two weeks later, another emergency announcement brought the overnight rate to 0.25%, which the Bank described as the "effective lower bound": essentially, as low as it was willing to go.

The stated rationale was clear: support the economy and maintain financial system stability as the pandemic forced lockdowns across the country. Alongside the rate cuts, the Bank launched several support programs, including a new Commercial Paper Purchase Program to ease strains in short-term funding markets and secondary-market purchases of Government of Canada securities of at least $5 billion per week.3

How Mortgage Rates Responded

Mortgage rates followed the Bank of Canada down, though not in perfect lockstep. Variable rates, which track the overnight rate through the prime rate, dropped quickly. Fixed rates, which follow bond yields, also fell but with more variation between lenders and over time, so we have not restated a specific rate range here without a dated, lender-level source behind it.

The stress test qualifying rate, the rate you must prove you can afford to get approved, was the higher of the contract rate plus 2% or the Bank of Canada's 5-year benchmark posted rate. That benchmark sat well above the actual rates borrowers were paying throughout 2020. OSFI did not move to today's flat 5.25% floor until June 1, 2021; before that date, the floor moved with the benchmark rate, which OSFI itself puts at 4.79% for May 2021, the closest documented figure to this period. Either way, the qualification hurdle in 2020 stayed well above the rates on offer, which limited how much additional purchasing power the rate cuts actually created.5

One general trend worth noting: more borrowers chose variable-rate mortgages during 2020 as the gap between variable and fixed pricing widened. We have left out a specific before-and-after percentage here because we could not confirm a single comparable figure against a primary source.

Mortgage Deferrals and Government Support

Beyond rate cuts, the most immediate relief for Ontario homeowners came from mortgage deferrals. Starting in March, all major Canadian banks offered deferrals of up to six months for borrowers experiencing financial hardship due to COVID-19. Millions of Canadians took advantage of these programs.

Deferrals were not forgiveness. Interest continued to accrue during the deferral period and was added to the mortgage balance. A borrower who deferred six months of payments on a $400,000 mortgage at 2.5% added roughly $5,000 in capitalized interest. But the programs served their purpose: they helped prevent a wave of forced sales in the spring and summer of 2020.

The Canada Emergency Response Benefit (CERB), launched in April 2020, provided $2,000 per month to millions of Canadians who lost income. For many homeowners, this covered enough of their monthly obligations to avoid default. Household savings rates actually surged during the spring and summer, as reduced spending on travel, dining, and entertainment offset income disruptions.

Through the fall, the deferral programs wound down. The transition was smoother than many feared, though the long-term impact of those deferred payments, and the debt they added, is still playing out.

The Housing Market Recovery Nobody Expected

The Canadian housing market froze in March and April 2020. In the Greater Toronto Area, sales had actually been running ahead of 2019 for most of the month, but in the second half of March (March 15 to 31), as the pandemic hit, sales fell 15.9% and new listings fell 18.4% from the same period a year earlier.7 Open houses were cancelled. Deals collapsed when buyers lost jobs mid-transaction.

Then, starting in May, something unexpected happened. The market came back, and not gradually: it roared back. Virtual tours and digital transactions replaced in-person showings. Pent-up demand from the spring freeze combined with historically low mortgage rates to create a buying frenzy that intensified through the summer and fall.

Full-year 2020 numbers tell the story: national home sales rose 12.6% to a record 551,392 units. The national average price reached $607,280 in December 2020, up 17.1% from a year earlier. By December, the seasonally adjusted annualized sales rate hit 714,516 units, the first time that measure had ever topped 700,000.6

Inventory collapsed. The sales-to-new-listings ratio reached 77.4% in December, among the highest levels on record against a long-term average of 54.2%, with months of inventory dropping to 2.1, the lowest on record. Bidding wars became common, particularly for single-family homes in suburban markets as pandemic-era demand shifted away from downtown condos toward houses with more space.

What This Means for an Ontario Borrower Today

Illustrative example, not a quoted offer. Consider a first-time buyer in Barrie, Ontario, looking at a $450,000 property in December 2020 with 10% down. Assuming a 5-year variable rate of 1.70%, their monthly payment on a 25-year amortization, calculated with the semi-annual compounding Canadian mortgages use, works out to approximately $1,660. A year earlier, with variable rates closer to 3.20%, that same payment would have been about $1,960: a difference of roughly $300 per month, or about $3,600 per year. Rates used here are illustrative only, as of December 2020. OAC. Rates subject to change. Conditions apply.

But here is the catch. That borrower still has to qualify using the Bank of Canada's 5-year benchmark posted rate, not the 1.70% they would actually pay. Using the 4.79% figure OSFI reports for May 2021, the closest documented benchmark value to this period, the qualifying payment on the same $405,000 mortgage works out to approximately $2,310 per month. So even though the actual payment is about $1,660, the borrower needs to demonstrate income sufficient to cover roughly $2,310. The stress test effectively limits how much extra purchasing power these low rates provide.

Illustrative example, not a quoted offer. For existing homeowners renewing in late 2020, the picture is different and largely positive. A borrower who locked in a 5-year fixed rate of 3.49% in 2015 and renews at 2.19% in December 2020 would see their monthly payment on a $350,000 remaining balance, amortized over 25 years, drop by roughly $230 a month, or about $2,760 a year. Rates used here are illustrative only, as of December 2020. OAC. Rates subject to change. Conditions apply. The renewal letter from the bank will still be higher than what a broker can find, but the directional move is favorable. The renewal process itself is worth doing carefully regardless of the direction rates are moving.

What Comes Next: Heading into 2021

We have now spent nine months at 0.25%. The Bank of Canada has provided forward guidance suggesting it will hold the rate at this level until the economy recovers and inflation sustainably returns to the 2% target. As of December 2020, we are not there yet. Inflation remains below target, unemployment is elevated, and the pandemic continues to restrict economic activity.

But the housing market is telling a different story than the broader economy. Record sales, record-low inventory, and rapidly rising prices suggest a market that is running hot, driven by ultra-low rates and pandemic-era demand shifts. At some point, the Bank will have to reconcile these two realities.

The advice we gave most often this year was simple: watch the same indicators every Ontario borrower should be watching, the pace of vaccine rollouts, employment recovery, and the Bank's language around inflation. If economic recovery accelerates faster than expected in 2021, the timeline for rate increases could shorten. If the recovery stalls, rates could stay at the floor well into 2022 or beyond. Honest answer: nobody knows.

What we do know is this: the current rate environment is exceptional by any historical measure. Whatever your mortgage situation, the rates available today are lower than what most Canadians have seen in their lifetimes. The uncertainty is not about whether rates are good now. They are. The uncertainty is about how long it lasts.

For variable-rate borrowers, the question is whether you are comfortable with the risk that rates will eventually rise, not if, but when. For fixed-rate borrowers, the question is whether locking in at historically low fixed rates offers enough certainty to justify the small premium over current variable rates.

There is no universally correct answer. But there is a wrong approach: doing nothing, ignoring your renewal date, or assuming your bank's first offer is the best you can get. In a rate environment this unusual, working with a broker who monitors these movements daily is more valuable than it has been in years.