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.
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. ______________________________________________________
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%.