Bank of Canada Maintains the Policy Rate at 2.25%
Basis Points (bps)
A basis point, abbreviated bps, is one hundredth of a percentage point, or 0.01%. Lenders, the Bank of Canada, and the bond market use basis points to describe rate and yield changes precisely, so a 25-basis-point move means a rate shift of 0.25%.
Basis Points (bps) Quick Facts
- One basis point equals 0.01%, or one hundredth of a percent
- 100 basis points equal one full percentage point
- Used for interest rate, bond yield, and spread changes
- Removes confusion between relative and absolute percent changes
- A 25-basis-point change equals 0.25%
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What Are Basis Points
A basis point is one hundredth of a percentage point, so 100 basis points equal 1%. The term, abbreviated as bps and often pronounced “bips,” provides a precise way to talk about small rate movements without the ambiguity of percentages.
Saying a rate rose 25 basis points is clearer than saying it rose 0.25%, since a one percent increase could mean a full point higher or one percent of the current rate. Lenders quote mortgage rate changes, prime rate moves, and bond spreads in basis points.
Why Basis Points Matter for Mortgages
Basis points are the language of rate changes, so following them helps you read every rate announcement. The Bank of Canada notes that “A basis point is one hundredth of 1%,” and it moves its policy rate in basis-point steps that flow through to your mortgage.
Small basis-point differences add up over the life of a mortgage. On a $500,000 balance, shaving 25 basis points off your rate saves roughly $1,250 in interest in the first year on a 25-year amortization, which is why negotiating even a few basis points is worth the effort.
How Basis Points Show Up in a Mortgage
Basis points appear at several points in a mortgage.
Rate changes. Lenders and the Bank of Canada raise or lower rates in increments of 10, 25, or 50 basis points, and variable rates move with them.
Bond yields and spreads. Fixed rates are priced off the Government of Canada (GoC) bond yield plus a spread, both quoted in basis points, so a 10-basis-point move in the GoC bond yield often nudges fixed rates.
Fees and premiums. Mortgage default insurance premiums and some fees are quoted as a percentage of the mortgage amount, where 400 basis points equals 4%.
For example, the Bank of Canada cuts its policy rate by 50 basis points. Prime falls by the same 0.50%, so on a $500,000 adjustable mortgage, your rate drops half a percentage point, trimming the interest portion of your payment right away.
Common Mistakes and Misunderstandings About Basis Points
- Confusing a basis point with a percentage point
- Thinking 100 basis points equals 100%
- Mixing up basis points with mortgage discount points
- Assuming a small basis-point change does not matter
- Believing that basis points apply only to the policy or prime rates
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Frequently Asked Questions (FAQ) About Basis Points
What is the difference between a basis point and a percentage point?
A basis point is one hundredth of a percentage point. So a full percentage point equals 100 basis points, and 0.25% equals 25 basis points.
How much is 25 basis points?
25 basis points equals 0.25%. If your rate is 5% and it rises 25 basis points, it becomes 5.25%.
Why do lenders use basis points instead of percentages?
Basis points remove ambiguity. Saying a rate rose 25 basis points is exact, whereas a 1% increase could be read in two ways.
Are basis points and mortgage points the same thing?
A basis point measures a 0.01% rate change. Mortgage points are a form of prepaid interest, more common in the US than in Canada.
How do basis points affect my mortgage payment?
Each basis point changes your interest rate slightly. On a large balance, even 25 basis points can noticeably affect your payment and total interest.