Rates and the Bank of Canada

For many it's hard to understand why lenders aren't lowering interest rates more.  They read stories about the Bank of Canada chopping rates to an all-time low and wonder why banks are being so darn greedy.

For many, it's due to a misconception that banks borrow from the Bank of Canada to fund their mortgages.  For the most part, they don't.  The Bank of Canada's overnight rate might be 1.50% at the moment, but lenders are paying far more than that for the money they lend out as mortgages.

Many 5-year fixed-rate mortgages, for example, are based on the Canada Mortgage Bond, which was last issued at 2.70% in December.  But market rates are always changing, so lenders have to project where future rates will be when calculating their cost of funds.  They also have to add in risk premiums, intermediary costs, hedging costs, and some kind of profit margin.

It all adds up.  Fortunately, however, the trend for rates has been lower as of late. In addition, lender profit margins are under a lot more pressure today due to all the competition out there.