BMO Is The First Big Bank to Prime

BMO lowered it’s 5-year variable rate to prime (2.25%) today.

It’s the first of the Big 5 banks to offer variables at prime in about a year.

BMO’s press release calls it the “lowest rate in more than 30 years.” This apparently refers only to BMO’s own variable rates, since prime and “prime minus” are already being advertised by brokers.

Other banks will likely follow BMO’s lead, perhaps some sooner than others.  The prime – BA spread is wide enough to permit it. 

Terminology:  The "prime-BA spread" is simply prime rate minus the 30-day bankers’ acceptance yield.  In very raw terms, it represents gross lender margins on variable-rate mortgages. From this spread, lenders have to pay liquidity/risk premiums (when raising lending capital in the credit markets), customer acquisition costs, overhead, salaries, etc. The remainder is profit.

The prime – BA spread is currently at 1.95, whereas it averaged ~1.70% before the credit market went haywire last October. 

Incidentally, the 1/4% gap between today’s spread and the historical average corresponds to the 1/4% that lenders felt unable to pass along to consumers when the BoC cut rates last December.