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.
In general I agree, however my confusion lies with
If bank can profit when rate was say 3%, how can they not “adjust” equally when rate is 2% or 1%?
Unless BoC drops 1% and bank’s cost has gone up 0.5% = bank can only drop 0.5% while keeping the same profit margin
And lastly, IF BoC raises 1% overnight, in your honest opinion, will big 5 wait to raise 1% or only raise 0.5%?
Will their “cost” suddenly go up overnight as well?
But then, banking is as confusing as gas pumps. $35 crude = 80 cents?
I understand this concept for fixed rates since they are tied to bond rates (even though the spread between the two has been unusually high for the last 5-6 months). However if the BOC rate increased wouldn’t a variable mortgage rate also increase. And visa versa with decreasing rates. Other than greed why might this not be the case? I am hoping that someone might shine some light on this.
I’m guessing that some of the recent activity is an attempt to get customers to close accounts. They don’t make money off of unused lines of credit, yet they still have to factor them into their capital ratios.
Al–if the customer does not use the line of credit, then what difference does it make what the rate is?
Here’s the bottom line, banks do what they want, get over it!