At the moment, gross margins (spreads) on 5-year fixed rate mortgages are roughly 197 basis points—based on a 3.44% 5-year fixed.
Variable-rate margins are a whopping 51% less at roughly 96 basis points—based on prime – 0.85%.
Given the abnormally large ratio of people going variable today, banks like RBC are getting tired of relying on cross-selling to make variable-rate mortgages profitable. For monoline lenders it’s even worse because they have nothing to cross-sell.
RBC’s official response as to the reasoning behind this move was:
“Mortgage rates are tied to the banks funding costs which change from day to day. Due to global economic concerns, the funding costs for banks have been increasing. While we have held off in passing on these high costs to our clients, it is now necessary for us to increase this (variable) mortgage rate.”
The takeaway, if you’re a consumer, is this: If you’re in the market for a variable rate, get a rate hold soon to be safe. While prime rate can always change, scores of lenders offer 90 to 180-day rate guarantees on the discount to prime rate.
August 24 Update: BMO, TD and Scotiabank have also set their posted variable-rates to prime – 0.00%.
Rob McLister, CMT
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