TD Raises Prime 1/4 Point

TD-Bank Prime rate is on its way to 2.50%. 

TD just announced that they’re increasing their prime rate by 25 basis points, effective tomorrow. 

TD is the first bank to raise prime after the Bank of Canada’s rate hike today. The other big banks will probably be right behind.

Prime-Rate 

Some had hoped that the banks would not raise prime today—effectively “giving back” the 25 bps they “kept” on December 9, 2008. (At the time, the Bank of Canada had slashed rates 75 bps. But with spreads compressed by the credit crisis, the banks said they could only afford to cut prime by 50 bps.)

Given today’s spread between discount variable rate mortgages (VRMs) and bankers’ acceptance (BA) rates, it doesn’t look like we’ll get that 25 bps back for a while—if at all.

At the moment, the VRM-BA spread is currently around 119 bps: 

2.00% [typical VRM rate of prime – .50%] – 0.81% [3-month BA rate] = 119 bps

Lenders also have to account for securitization costs in many cases, which reduce spreads even further (a minimum of 13 bps based on the last Canada Mortgage Bond floating-rate issue, plus related costs).

Then, of course, banks have to consider funding costs for all the other products they offer that are based on prime rate.

Long story short:  Lenders like to make 120-130 bps spreads on 5-year mortgage terms. “Eating” today’s 25 bps BoC hike (and not raising prime) would make margins far too close for comfort.
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Update:  As of 3:15pm ET RBC and CIBC have followed TD’s lead in raising their prime rate from 2.25% to 2.50%.

  1. Is the subtext saying that it’s fair for them to not to eat the 0.25% in addition to keeping the 0.5% and adding the 1.00%?
    Banks are the devil.

  2. Hi Chris,
    The devil huh? Guess we’ll never convince you that banks are the rock that keeps Canada’s financial system together? :-]
    Lenders have required profit margins like any other business. The spreads today don’t allow them to absorb a 1/4 point rate hike. That’s the long and short of it.
    By the way, what did you mean by “keeping the 0.5% and adding the 1.00%?” It’s been a long day and that flew over my head, sorry.
    Rob

  3. Wake me up after another 6-8 rate hikes… then the banks would have prime at around 4%-4.5%.
    $300,000 @ 1.5%/25-yr = $1199/month
    $300,000 @ 4.5%/25-yr = $1660/month (38% higher)

  4. Yes I do think debt is evil :) Always will, as a 30 something, my peers are swimming in red waters in a major way. Most people didn’t buy houses in 2000 or so, and waited for them to inflate so are now juiced at 300k mortgages. Tough life when I started at half.
    When the BoC dropped 0.5 way back, they never passed it on is what I meant. Then they all added 1% to their prime rate when the BoC never added anything. I signed my loan at prime (fine print said they could do whatever they wanted). Point is, that they did do what they wanted and jacked the rate as it suited them. Profit driven machines, but not everyone understands this.
    They are the enablers that push the prices of everything upward since it makes everyone compete with borrowed dollars – and “monthly payments” rather than who can pay the actual principle so as to keep prices down. When incomes don’t rise, and payments get extended to 25 years, naturally everyone can afford it, though is sucks more money out of their pockets over their lifetime and the economy.
    Houses prices are whatever people are willing to borrow and the banks are willing to lend.
    No, I don’t think the banks are holding anything together. They’ve just pushed it to the point where we all NOW need them.
    It’s kind of like giving up crack. It can be done, but it’s not easy.

  5. Again another great post guys… it can be challenging to explain the spreads and how the pricing of VRMs works. I think the really story behind this TD announcement though was “the e-mail” that has turned into a nightmare for my inbox.

  6. Debt is evil? Without debt people wouldn’t have homes, companies wouldn’t exist, and you wouldn’t have a job!
    You got your facts wrong on the BOC too. The banks passed along all BOC rate drops except for 25bp in December 2008.
    The only time they added 1% was when the credit crisis caused mortgage costs to soar over 1%.
    I think the person that doesn’t understand banks is you my friend!

  7. “Then they all added 1% to their prime rate when the BoC never added anything.”
    I still remember when my LOC interest went up. The bank explained that they had tried ever so hard not to, but they just couldn’t help it. I was glad not to owe anything on it.
    I was just reading over a LOC agreement on the weekend and I had a good laugh because you worded it exactly right. The bank can do almost whatever it wants.
    A healthy amount of skepticism about this “virtuous” world of finance is at all times a good thing.

  8. FWTTB,
    Banks are kind of like lemonade stands on a hot summer day. If the price of lemons goes up, so does the lemonade.
    In fall 2008, lemons got pretty expensive. The cost of line of credit (LOC) funds skyrocketed to never-before seen levels. And not suprisingly, banks had zero option but to raise their “Lemonade” (LOC) prices.
    Mind you, the credit crisis subsided months ago, so it would be nice if certain lenders started discounting their lemonade a little more.
    :-]

  9. It’s non-sense to think that nothing can be done without a bank loan. It just takes longer and requires the hardwork be done on the outset rather than drawing it out. Savers vs. spenders, long term look versus instant gratification. If everyone were savers by nature, we’d all be working out of cash reserves instead of working out of the banks hands. Do whatever you want with your debt, but don’t be fooled to think that the world can’t work outside of debt. It’s what the rich know, that you don’t. They have it, you borrow it from them!
    It’s well known that foreigners live with their parents and buy houses with cash or else pack houses full of working adults to eschew debt faster. Some cultures prohibit borrowing money because it’s a sin. Imagine that.

  10. Hey Chris L.
    If you want to live with your parents until you’re 40, knock yourself out. Just don’t expect the rest of society to share your insanity.

  11. And the alternative it to live with the banks until you are dead. At least mom makes warm meals…and the banks…well they just steal meals.
    There are alternatives to massive debts though, of course, try exploring them.

  12. Hi
    Debt by itself is not evil. That is kind of a odd thing to say. Obviously I would rather not have a mortgage but I am also glad to be able to buy a home now. I could not imagine making my family wait until I am 50 to buy a house with cash!
    Rg
    Ravi

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