Prime – 1.00% Variables

We definitely believe it’s going to get back to prime minus 1…It’s a rate war out there.

That’s a broker talking about variable rates, as quoted by the Globe & Mail a few weeks back.

If we truly knew variable-rate mortgages were headed back to prime – 1.00%, we could strategize appropriately. For example, 1-year terms would be even more compelling—on the assumption borrowers could renew into even cheaper variable rates 12 months hence.

John Bordignon, EVP Strategic Development at Paradigm Quest, says, “Consumers have been asking for adjustable rate mortgages (ARMs) more and more, which in my view is one of the reasons we’ve seen such competitive pricing.”

“In the broker channel at least 65% of the volume has been ARM versus fixed,” says Bordignon. “Historically it’s the other way around—65% fixed, and the balance ARM.”

George-Hugh-ING George Hugh, Vice President, Lending Sales at ING Direct, tells us: “We can’t expect much more discounting.” Hugh senses that profit spreads on variable mortgages are near their minimum.

“We’re in very abnormal market conditions. Mortgage pricing is being driven by excess demand for mortgage business from balance sheet lenders (big banks).  For the most part, these needs are being driven by securitization and other debt issuance programs.  In addition, the Big 5 banks still have a ton of deposits where they pay ‘zero’ interest…and they have to put that money to work. This excess demand is causing mortgage spreads to deteriorate. But now we’re pretty well at a floor.”

“There seems to be a perception that prime – 1(%) is coming back,” Hugh says. “I don’t feel we’re going back to the prime – one days. There’s too much risk in the market and not enough spread for that risk.”

At prime – 0.65%, today’s gross variable-rate spread is roughly 108 basis points (2.35% minus the 30-day banker’s acceptance rate). That’s materially under the 120+ basis points that lenders have typically required in the past. From that gross spread, lenders need to pay securitization costs and/or liquidity premiums (in the case of banks using transfer pricing), hedging costs, underwriting costs, overhead, marketing costs, sales force compensation, etc.

At prime – 1%, Hugh and Bordignon feel spreads would be unsustainable.

That said, there’s always the chance lenders may someday offer short-term prime – 1.00% promotions or “teaser rates”, but Bordignon feels, “We will not see prime – 1.00 as everyday pricing.”

Over the next few quarters, people may shift more into fixed-rate mortgages says Bordignon. “As prime increases, and it will, I think we will revert back to historical splits. That will ease demand for ARMs. In addition, banks won’t want to give up a lot of spread in the first quarter of their year, which begins November 1st.”

  1. Thank you, this post is very relevant for me as I was just offered prime – 1% on a 3 year variable rate mortgage or 3.19% on a 5 Year fixed mortgage. I’m wondering what the current odds are that the prime rate will increase 1.25% in the next 1 and a half years?
    Thank you

  2. Brent there are obviously strings attached to any P-1% rate in this market. Let me guess:
    1 – It is for purchases only. No refinances or switches allowed.
    2 – Your realter has to be a member of the broker’s “club” and pay monthly dues for you to get this rate
    3 – Your mortgage is fully closed for 3 years unless you sell the house
    4 – You can only convert into a poor fixed rate that this lender calls a “discounted” rate
    5 – There are no pre-approvals
    6 – The minimum amortization is 18 years
    7 – The lender charges a brutal IRD penalty if you try to break the mortgage early
    8 – There is no online mortgage account access
    I could go on….

  3. For a large mortgage of 200k+ go with a 1yr closed and wait for a 5yr variable to offer prime-1. On a smaller mortgage you can even go with a 5yr closed at 3.19% since you won’t see much difference inn total cost over the term.

  4. I’d go for prime -1.00 but I’d check the fine print first because Prime -.7 is the best rate available today on a full featured mortgage.

  5. Ya. Set aside a good two hours to read through all that fine print. There are no free lunches in the world of mortgages. A rate like that means you are giving up more than you realize.

  6. My renewal is coming up in a week. I am being offered 2.44% on a 1 year fixed closed term, or 2.25% (prime – .75) on a 5 year variable closed term these are both special rates with the F.I. that I work with. Any suggestions on which option I should go with. I am currently enjoying prime -.9 and reading this article makes me wonder if something like this might become available in the next 12 months and if the 1 year fixed is the way to go for now or if the variable prime – discounting will decrease in the next year.

  7. I think something really bad would have to happen for variable discounts to shrink. It would probably take another major crisis and those don’t come along very often. Personally speaking, a one year mortgage seems like a no brainer. Find a broker to beat that 2.44% rate. There is no shortage of better rates available.

  8. I am giving serious consideration to switching from 5yr prime variable after 12 months (see Switch after 12 months – link below). However, in addition to $2k in penalties, I’m surprised to learn from my broker that the refinancing will require legal work of another $1000 or so… Suddenly, the switch seems far less favourable! Does anyone know if there’s a cheaper way to get the legal done?

  9. Hi Jim,
    Thanks for your help. I asked the broker with Astrum Financial about the strings attached and it is only for purchases only which works for me, but my Realtor could be anyone.
    I was told the mortgage is closed but it is portable and assumable so I could take it with me.
    For the IRD I was told that it is based on the Canada Bond yield + 0.90% and in a rising interest rate market the IRD is rarely greater than 3 months interest? Could you explain how to do this calculation?
    I’m thinking the 3.19% 5 Year Closed is the way to go for me as I am more conservative in general and I would just like to do the research once and not worry about it after.
    I’ll make sure to read the fine print as I’m not sure why this offer is much less than others are quoting here.
    Thanks for your help.

  10. Legal work for what? Are you switching or refinancing? If you are just switching lenders, no legal work should be required.

  11. As far as I know, your Realtor MUST be an Astrum member and there is a cost for that. I’ve talked to Realtors about this deal and they refuse to associate themselves with Astrum. This is a VERY restrictive mortgage for the reasons above and others. In my opinion people would be totally foolish to bind themselves to such restrictions for just a 1/4% difference in rate.

  12. hmmm….thanks Ivory Tower. That was my question too. Surely breaking a 5yr variable and switching lenders doesn’t require legal work… It looks like I may be getting the run-around…lots of road blocks from my mortgage broker. Any mortgage brokers in Ottawa looking for a new client and willing to help me make the switch?!

  13. Firstline, no line of credit, 20% down
    10 months into a 5yr closed variable, 250k at prime, wanting to switch into either 1yr fixed, or another 5yr variable…broker is advising 3months IRD + legal fees for new mortgage…

  14. Hi Jamie,
    If it’s a straight switch (i.e. no change to the loan amount, no addition of a LOC, no increase in amortization, and you’re paying the penalty out of pocket) then legal fees generally won’t apply.
    The exception is when the new lender won’t switch a particular lender’s mortgage for free. What is the new lender and product that your broker proposed?

  15. Thanks for the info Rob. Is there any reason why my broker would be reluctant to switch this for me? Does the broker stand to lose in some cases? Or perhaps little to be gained for time spent? Broker seems unenthused despite the obvious benefits for me to switch out of a 5yr prime so early.

  16. Jim:
    I’m wondering what your opinion would be of Astrum if I told you that I am 100% sure that I will not break the mortgage. What would be the negative of this product then?

  17. Hi Houba, 3.64% is good for a 5-year fixed. You’ll definitely find slightly lower rates elsewhere and it never hurts to shop around. But if you’re 100% happy with the product features, advice, and service that RBC is providing, that’s the main thing. -Rob

  18. Jamie, I’d like to work with you on this and see what I can do for you. Contact Rob and ask for Mark in Ottawa. Seems to me like you are getting some weird advice.

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