BMO LOC Rate Increases

LOC-Rate-Increase In early October, banks began charging premiums above prime rate for variable-rate mortgages and lines of credit.  But, the increases only affected new customers.  Existing customers were safe.

Then, a few days later the Bank of Canada lowered rates and Manulife stopped tying it’s popular “One” mortgage to prime.  That move affected all of their customers and created a mini-firestorm for their PR department.  Angry customers quickly lashed out online.

Now, according to the Globe & Mail, BMO is sending letters to existing customers with lines of credit to tell them their interest rate will be rising by 1%.  The increase is due to escalating capital costs says the bank, and reportedly affects customers who got lines of credit before October 15.

Is this a trend?  Will other banks follow this move?  Craig Fehr, an analyst with Edward Jones, thinks they might. 

Fehr says, “I think we’ll see the rest of the competitors follow suit in some fashion…I think this is going to be the first of many product lines that will get repriced.”

National Bank analyst, Robert Sedran, explains why:  “Since the banks depend on deposits for much of their funding, if you reduce prime without being able to reduce deposit rates by the same amount, the margin gets squeezed…Increasing the borrower’s spread to prime restores some of that lost profitability. You could see more of that behaviour if interest rates continue to fall.”

With economists expecting the Bank of Canada to cut rates 1/2% on Tuesday, all eyes will be on the banks to see how they’ll react.  If the BoC’s key lending rate drops 1/2% but the banks cut prime only 1/4%, it may create quite a ruckus.

Regarding the line of credit rate increases, most lenders are already at prime + 1.00% for new business.  Customers who got lines of credit before October 2008, however, are still generally paying prime rate.  As a bank, it’s almost a no win situation, with essentially two scenarios: a) Hold rates, thus giving up profits or operating at a loss; or b) Raise rates and risk losing customers to lower-cost competitors.

In this day and age, with bank shareholders so unrelenting and loyalty to lenders so minimal, scenario B is probably the most likely outcome.


Source of quotes and BMO news:  Globe & Mail  (Hats off to the Globe for an excellent story)

  1. Not passing rate cuts to consumers is contrary to what the Bank of Canada is trying to accomplish by cutting rates. The poor consumer is the one ultimately being hurt by the greedy bank decisions. Shame on the greedy banks – Shame on them for not passing credit relief to the poor consumers.

  2. As a BMO LOC holder, I have kept my balance at 0% because the costs have been so high. I have kept the line open as a sort of rainy day emergency source of funding. I plan on closing this LOC now that BMO wants to make it even more expensive.
    As a BMO shareholder, I think that this move is a cash grab that smart consumers will resent a great deal. The only question I have is how smart are BMO LOC holders?

  3. How is it that the banks are allowed to do this? We have a 50K LOC through PC financial (luckily, the balance is well under 5K), which we signed legal papers for, and those papers promised PRIME. Isn’t there a contractual obligation for the banks to honor the rate people signed on for? I don’t get it.

  4. Hi MDJ,
    From what I hear it will apply only to BMO’s Personal LOC and Homeowner LOC. The ReadiLine is apparently unaffected. The increase is reportedly taking effect in March.
    Hi Sandra,
    Lines of credit are different than mortgages in that lenders have more discretion in setting the interest rate. While LOC rates have usually tracked prime rate, this is not always mandatory, as recent history has shown. Unfortunately I can’t comment on PC’s LOC because I don’t know that much about it.

  5. A few years back I had a secured LOC that was at the banks prime. Do they still offer secured LOCs at prime (when you have a good credit rating) or are they now prime + 1%?

  6. Hi Joel,
    There’s still a few lender’s left at prime on a secured LOC. In some cases you have to get your mortgage with that lender also, and/or they will offer prime only on an exception basis.

  7. BMO pulls this same stunt every year. In other years it has been .25 or .5%, this year they are going for a full 1%. I am a long time customer of BMO with various LOC accounts including a Personal LOC. I have a very low tolerance for these tactics and don’t understand how BMO gets away with this. I also deal with other financial institutions and I have never seen this. I will do my usual rant with my Account Manager at BMO which has been able to reverse this ‘change in policy’ every year. When I have a signed agreement to have a loan at prime I expect BMO to maintain their end of the deal. If they do not honor their agreement my money will walk.

  8. My homeowner LOC just jumped 1% from negotiated rate. Those sly #%#$^@ at BMO think we wont remember this back stabbing! Last time I hesitated to move to PC financial, next time mortgage comes up, it’s off to superstore I go. BMO=profit-hungry-#&^%@$#

  9. Hi Rob, you stated “There’s still a few lender’s left at prime on a secured LOC.”
    Can you share with us who they are.

  10. not good business practice. bait and switch. Take your money out of BMO and also all the other banks. Support locally focused credit unions. (I have a BMO PLOC, the reasons gave in the letter made me laugh – I’m currently tied to them, but as soon as I can I’ll stop all business with BMO)

  11. The CIBC has just advised me they are pulling this stunt on the secured LoC we have.
    I wrote the governor of the Bank of Canada and the Globe business editor – both answered, maybe there will be action.
    Anyone know a lawyer that would organize a class action?

  12. I too recieved a letter from BMO that said my interest rate will go up 1% . This is a year after I negotiated a rate which is supposed to move with the prime. I contacted both TD and Royal Bank and both of them said they did not increase the base rate on existing secured LoC with their clients, only new ones. I have talked to Royal Bank and I am getting a new LOC (even if it only matches BMO). More people need to do this to show BMO that people are not going to just sit back and take it on the chin. I will never take a loan out with them again and will express this in a letter when I move my LoC to another bank.

  13. Those Fools at CIBC just sent me a letter telling me my LOC rate is going up by 1%.
    Thats the last they will see of my money. The disconnect of prime from BOC rate pissed me off and this drove me over the edge. Hope the banks go broke and all their fools making these policy decisions go bankrupt.

  14. I also received this notice on my CIBC PLOC (really a Home Equity secured LOC). I switched my mortgage from BMO to CIBC in 2007 even after BMO matched, etc., with plans to open a secured PLOC (secured against home equity). I have a variable rate mortgage with CIBC now also.
    If they are going to do this unilaterally on mortgage-based PLOCs then they should waive all penalties and discharge fees for these secured loans (including the sometimes associated first mortgages) to allow no-fee portability.
    As an unsecured PLOC customer, you can easily move to another more competitive FI but with the secured (against your home) PLOCs you are tied to them unless you pay all the penalty and discharge fees! You are captive which is crazy!! This really should move to class action status….at least on the secured PLOCs they are increasing rates on.
    I am escalating on this principle with CIBC and after that the various government entities who oversee/regulate.

  15. This rate increase in he PLOC is absolutely ludricous. I have a call into my banker right now and will threaten to pull out all our business (30 years) if he reduces the rate..i’ll keep you posted and if anyone has had any luck with their bankers…please advise…we bank with CIBC

  16. I knew when I read this earlier in the year that the TD Canada Trust and every other FI would eventually make the change. TD sent out letters this week to all existing HELOC account holders advising that all their real estate secured line of credit rates that are currently set at Prime will be increasing to P+1. They cite that their cost of borrowing doesn’t allow them to make enough money!
    It amazes me that the banks charge lots of money in appraisal & legal fees to formulate a secured Heloc only to change the rates at will. No different than a visa except with a HELOC, you pay over $800 in fees to set it up. This country needs strong banking reform now!

  17. C’mon wimps. Stop complaining.
    Get organized, boycott one particular bank take your business elsewhere (albiet probably at the same greedy terms)
    The bank losing the business will soon see the light and the rest will follow.
    [Edited for language – CMT]

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