3/4% Rate Cut!

Falling-Mortgage-Rates Canada is “entering a recession.”

That’s what the Bank of Canada said today as they hacked off 3/4% from Canada’s key interest rate.

Today’s was the biggest move since October 2001.  The National Post called it “radical.”  Prior to this announcement, 20 out of 23 economist surveyed by Bloomberg had predicted “just” a 1/2% cut.  Only two foresaw a 3/4% move.

Canada’s overnight rate hasn’t been this low since 1958.  (The record low is 1.12%)  TD, for one, expects further rate cuts in 2009.

Speaking of TD, they were the first to change their prime rate today.  Much to the disappointment of many variable-rate mortgage holders, TD lowered their prime rate by only 1/2%.  This time they chose not to explain why they didn’t match the BoC’s 3/4% reduction.

CIBC quickly followed TD’s lead and also lowered its prime rate by just 1/2%.  Given that variable-rate margins are still tight, the rest of the banks will likely cut by only 1/2% as well.

Canada’s 5-year bond yield is currently down to 2.17%.

The 30-day bankers’ acceptance yield is now at 1.97%, down over 1.00% since the Bank of Canada’s last surprise rate cut on -October 8.

The BoC’s next interest rate meeting is January 20.

  1. Provided you can find and need financing, there seems to be cheap money out there! (speaking from an investment real estate point of view).

  2. Looks like the Banks are only passing on 0.5%
    Still a nice dip for Variable Rate holders.
    Bad sign for other aspects of the larger economy.

  3. Can you explain why recent cuts are not really affecting “fixed rate” mortgages? With the overnight rate at a 50-year low it seems strange to me that the posted rate for a five-year fixed is still pushing seven per cent.

  4. When I signed up on a VRM I expected the banks to follow Prime -discount. That’s was I told and led to believe. If the BoC drops its rate by 3/4 percent then the banks should follow, otherwise their short changing us. TD and RY posted big profits, what is this ? If it were a 3/4 percent increase the banks wouldn’t hesitate to raise their rates.

  5. Even though borrowing might be getting cheaper, it’s getting tighter to get access to.
    Not to mention, the pool of fools that would buy overpriced property in a declining market when interest rates have very little room to the downside (i.e. they have to go up eventually) is getting smaller every day.
    Property still has a long way to decline. At least 30% more in Vancouver/Victoria.
    It can’t happen here? Read up on Japan’s real estate slump, and compare what we’re doing.

  6. one difference in japan and Canada, Canada attracts immigrants. Engish is language understood by many nations, Japanese is not.

  7. Vince,
    No offense, but you obviously didn’t read your mortgage. VR mortgages are based on the LENDER’S Prime rate, not the Bank of Canada’s Prime rate.
    It is certainly true that the Banks *almost* always follow the BoC. But they don’t have to, and they haven’t *always* in the past.
    In this case, I don’t begrudge them. They are having difficulty getting access to liquid funds.

  8. Ted,
    Yes I’m fully aware that the banks don’t have to lower their rates, however the banks certainly don’t advertise the fact. If it were a 3/4 percent increase they wouldn’t take their time about raising their rates. When the banks are posting the profits they are and its still diffcult to get funds, the least they can do is drop their rates. Their more interested in their stock price then they are about their clients.

  9. You just need 1 lender to be brave to be the first one to cut 0.75, then everybody else would follow
    so, if BoC only cut 0.50 today, what would the banks cut? 0.25? or 0.5?
    It’s nice to be on VRM and HELOC now for sure, but I want my 0.25 savings!

  10. Hi Jerry,
    I think unless you have a different government in Ottawa banks are not going to pass any big cuts to the unwashed public. Rightly or not, big cuts will not help much unless these cuts are past onto to public a large. What do you think MT?

  11. The Federal government has 2 primary ‘tools’ to steer the ecomony. The money supply and the Central Bank Rate. By not passing on the cut in interest rates, the ‘Big 5’ banks are imposing themselves into the government’s efforts to restore our economy. Given what we have all witnessed south of us, how can Canadians sit back and watch ‘for (huge) profit’ banks super impose their needs over th eneeds of the Country?

  12. ‘Wow! Nothing like the topic of interest rates to generate a bunch of posts
    For those who renewed or took out a mortgage this past spring or summer…
    We heard the advice “Lock in and get yourself a good nights’ rest…” Those who ‘locked in’ may have a ‘restless’ night tonight. They may be wishing they took a variable, when a discount was still offered. (I am not referring to those who have questionable job security, those who have mortgaged a house for more than it is worth, or those who were not offered prime minus a dscount.) Nighty night….

  13. Agreed with you Dynamite. I have been sleeping very well since I had my variable mortgage. I guess when prime double, I’ll start feeling the pain, but I don’t think it will double anytime soon. Besides, when the rate start to climb back up again, I can lock in and still come out ahead. However, now is probably not the time to get into variable anymore.

  14. for those who are still apologizing or defending the oligopolistic Canadian banks, you’re not fooling anyone.
    the cost of money has come crashing down. the banks are using the smokescreen of the financial crisis to make as much money as they can on the backs of hard working Canadians.
    they should be ashamed of themselves – not that they know the meaning of the word.
    best rates are found elsewhere – do NOT give your business to the big banks. Period.
    there are other options out there.

  15. Yes that a good question would it be a good time to lock in say in about 6 months to one year from now once the rates are at their lowest and just about to rise again. We are at a historically low. Now this would only be worth if the rate will rise quickly otherwise we might as well take the slow rising but lower interest rate.
    opinions.. ?

  16. I agree with Vince and question whether Ted may be a bank executive…don’t begrudge them?
    why do you think the Central Bank lowered the rates to an alost historical level? to help the banks improve their profitability? or to get people borrowing again to help spur the economy?
    before the Fed lowers rates, it should get sign on from the banks that they will follow suit.
    I too factored in that they would when I went variable and I dont “appreciate” a half point cut now. I dont care what the fine print says, the whole sales pitch is geared toward making you believe that when the Key rate falls, the banks’ prime will fall the same. shame on them and they are only shooting themselves in their feet by aiding in a longer rescession than necessary.

  17. Hello Komrades,
    I too agree that the capitalist dog banks should do as the state tells them. Death to market based pricing!

  18. Babak – you’re absolutely wrong. Do some homework before you post.
    Source: http://www.thinktorontohomes.com/blog/2008/10/10/confusion-in-the-mortgage-market.html
    “The assumption in the past has been that they borrow from the Bank of Canada and make money on the spread in between, and that spread has been pretty juicy,” Mr. Olkowski said.
    “The problem is, they’re not borrowing from the Bank of Canada, they’re using other instruments in the marketplace which may have saved them money in the past but are costing them money now. It’s hard to retool a bank, it’s like a freight train. Putting on the brakes and doing something different is not exactly what they’re used to.”

  19. With this economic climate, what are peoples thoughts on borrowing money to invest? Suggestions on lenders and sectors to invest?

  20. agreed,Al, very funny (seriously)re capitalist dog banks. however, I submit there is a difference between dictating rates and getting buy in before lowering them.
    more importantly, my last statment re banks shooting themselves in the foot was in fact addressing the market pricing issue – if they want business to start flowing again, its in their interest to lower rates as much as possible, not scoop profits.

  21. I assure you Al, I am as right wing as you if not moreso…The banks are entitled to set the rates for their products. They have done this by ceasing offerings of “prime minus xx” mortgages and now offer “prime plus 60 or 100 bps”. But home owners who signed variable rate mortgages based on the Prime Rate and the Bank Rate moving in lock step should expect the banks to pass on the full reduction.

  22. Hey Nathan,
    I’m on the same page as yourself for market forces, though with a different conclusion. What we’re talking is price * volume = revenue. Since there is no hope for volume to go up much anyway, better to hold the line on price as much as possible against the communist like central planning committee, er I mean central bank. I’m also inclined to believe that the banks are anxious to deleverage, so losing some business is not a great concern.
    I suppose I’d be pissed if I made that assumption too, especially if the low priced help at the bank mislead me. By the way, I’m actually not that far right but I do believe the market generally does a better job at pricing stuff without central planning committees interfering.

  23. Does anyone know why banks have been pushing HELOCS for the past few years?
    It’s because HELOCS are not mortgages.
    Mortgages are encumbered by a long history of court cases. This case law restricts a banks rights in favour of the borrowers.
    HELOC’s are a different animal in terms of callability, changing of terms, increase rates and are not encumbered by the same case law as mortgages.
    If you think that banks not lowering their prime rate in lock step with the government was bad wait until they start restricting the HELOC product itself.
    Expect to see over the coming months decreases in HELOC limits, more restrictive terms, forced amortization and outright calling of the HELOCS for re-payment.
    Understand that they have these rights and when things get tough they will exercise them.

  24. If you are not happy with the banks, and most of these posts suggest that you are not, then send them a message through where you get a mortgage. Mortgage brokers will open up the doors to many companies outside of big banks. Many of these companies have more reasonable qualifying criteria and more flexable mortgage products. Go to http://www.klickit.ca to find a mortgage broker/agent that works in your community.

  25. Nathan, the overnight rate as well as the bond rates has cratered. The BoC benchmark rate has cratered.
    The cost of money for banks has stepped into an empty elevator shaft.
    The clueless Canadian consumers who swallow the big bank propaganda lose and make it more difficult for the smaller group of clued in consumers to get better prices.
    Check the rates yourself:
    look forward to the day the Canadian banks are humbled – the only reason they aren’t is because of mega bucks to lobbyists on parliament hill to protect them from the big bad competitive banks from around the world.
    I’ve worked in a large bank btw so I know what I’m talking about.

  26. Just to be daring I went to Bank of Montreal, they offered me a 5 yr fixed rate of 4.79%. I took this info to TD where my current mortgage resides (open) and they said it was too early to know what TD’s new fixed rates would be, for me to wait a week or more, no problem since I have time to wait before renewal. FYI, last week a TD branch (not my home branch) offered me 5.05% for 5 yrs fixed, the offer was ONLY good for one day until closing. I decided not to sign and take my chances to see what happens after Dec 09, now today after leaving BMO a different TD branch offered me 5.2% 5 yr fixed, no consistency at TD branch to branch. My usual TD contact person was not in at my home branch, I’m hoping for better rates when I meet him next week. Meanwhile, BMO said if I signed an application with them (and let them check my credit even though I have a recent credit score copy in hand) they could hold the 4.79% 5 yr fixed rate for 3 months and even come down if they drop more. Should I do this in case TD won’t match BMO’s better fixed rate? I’ve banked my whole life at TD, is there any harm to me in applying for the mortgage at BMO to hold the rate and then simply not taking it if TD later matches the better BMO rate within 3 months? Please advise, I don’t want to piss off TD, they may come after me…

  27. Hi all, does anyone out there know why the mortgage rules changed in the 70’s from a life time 3% product to a VR/loc in/ twisted mess ? Talking with my parents and grandparents they signed ONCE. It was locked in, done deal. How did this change and who let it happen ?? I suspect the big banks pushed for it and got what they wanted …big profits, just like a 30% credit card. Laws should be passed, 3% mortgages period, 5% cedit cards period, 4% loans for anything else. Stop drownding the working man/women for Gods sake. Balance this, balance life.

  28. Cora, i dont see anything engative with going with BMO (i admit im one of their customers and im satisfied with the rates they ahve and will probably go with them in march when i get my condo) I mean you shop for whats best for u! Banks should be more competitive and i think BMO has been winning in that. TD is the first to announce not passing on the full rate cut to cutsomers if you’ve noticed (im only talking in the last few months when i started chacking the rates), let us know what you decide Cora and what TD offers you :)

  29. There is no down side in having a 90 day rate guarantee in your back pocket while you continue to shop. The only potential downside is that every application will result in a Credit Bureau being pulled by the Lender. If you have too many inquiries on your Bureau, it will adversely affect your Beacon score. How many is too many? That is not clear nor explained by Equifax. But 3 or four in a month of shopping for a mortgage is not unreasonable.

  30. if you did not sign any thing with TD, they cannot harm you in any way, it is your personal freedom, and you have to do what is right for you, not them.

  31. Cora: You should never be scared of the big banks. The banks became a necessity in life because that’s how our parents feels (the boomers). There are so many options for us now. Get yourself the best rate and switch bank if your current one doesn’t treat you right. Normally they’ll come back and offer you something better. It is your money that allow them to be successful.
    Also, I think when you are shopping and allow these banks to run inquiries on your credit, sometime it turns out better because the other banks know you’re shopping. You should find a broker too, may be they can get you a better rate… These are all options, you should use them to your advantage.

  32. I never really understood the reasoning for dropping prime so dramatically. If the primary reasoning for dropping prime is to stimulate borrowing/lending and thus the economy, why are they doing something that mainly effects CURRENT mortgage holders. Banks have countered the decreased rate with variables @ Prime+. So in all actuality the effective interest rate of our situation has remained about the same at 4.5% because most lenders are at Prime+1. Six months ago when we were at prime at almost all HELOCs were sitting at 4.75%. So now that Prime continues to drop, people are sitting at 3.5% or less on existing variable products (which is great for them) but what is the primary goal? To stimulate lending.
    In hindsight, if we wanted to stimulate lending/borrowing, why wouldn’t the major banks of Canada and the Bank of Canada get together and communicate. Obviously the banks don’t want to lose money but that is what appears to be happening every time Prime is lowered. And really, is this helping new lending? No because we’re still at about the same effective rates as 6 months ago.
    Obviously the Bank of Canada can’t say to banks, “make your variable products all discounted to stimulate lending/borrowing”? However, if we really wanted to stimulate the economy that’s what they would do. Instead the bank is losing money on their existing variable products and continue to increase the products to prime ++ which isn’t beneficial for borrowing.

  33. I think the banks mainly care about making as much money as possible, being perceived as good corporate citizens, and maintaining gloriously high executive bonuses. Probably in reverse order. So, the only thing we bank customers with VR mortgages can do is contact our account managers and our MP’s and vent on them. Then we might get the last 0.25 point, as happened for the recent cut. Vent On fellow mortgagees!

  34. bank of canada annonce Consumer debt default could rise. that will lead to more significant increase in defaults rates of mortgage. what that mean?

  35. bank of canada annonce Consumer debt default could rise. that will lead to more significant increase in defaults rates of mortgage. what that mean?

  36. Correct me if I do not remember correctly but didn’t TD (in the last BoC rate cute) withhold some of the rate cut, but then matched the cut to their Prime rate after customers complained?
    I know I already have…

  37. Luke – that’s exactly the reason the Bank cuts prime. There are lots of other things tied to prime besides mortgages: car loans, lines of credit, student loans, etc.
    People who are paying less to service debt have more money to spend on other stuff. It’s as simple as that. Banks may not pass the entirety of the savings on to new customers, but some usually trickles through, and in the meantime everyone with an existing agreement has more money to spend on the goods and services that drive the economy.
    Al R

  38. I’m not sure how many people here actually CHANGE their mortgage payments when the BoC lowers their rate. The benefit I see (and what I believe most do), is to keep payments the same and have more money go towards the principle.
    That is something I DEFINITELY like and want (and why I want the banks to follow through with a complete match of the BoC rate cut, since they wouldn’t hesistate to raise it the same level if it was the reverse).
    I’m sure lower rates will give people room to lower their mortgage payments should trouble arise (not able to pay) – but I don’t know how many people actually fall into that category.

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