The Banks’ Delay on Fixed Rate Drops

Falling-Fixed-Mortgage-RatesLast week once again validated the old saying:  Mortgage rates take the elevator up and the escalator down.

With bond yields plunging, spreads (margins) on 5-year fixed mortgages closed Friday at 190 basis points. 135 bps is closer to normal, at least on deeply discounted 5-year terms, says capital markets expert John Bordignon from Paradigm Quest.

That’s prompted many to question why the banks haven’t lowered fixed rates yet.

In speaking with lenders the answers we’re hearing are that:

  1. Banks are hesitant to lower rates until the dust settles in the bond market. “Banks are pricing wider due to volatility,” says Bordignon. “Yields could rise just as fast as they’ve fallen.” He notes that banks offer long-term rate guarantees and can be “trapped” if rates run back up on them.
  2. Banks are hoping to somewhat offset narrower profits in variable-rate mortgages (which have risen in popularity).
  3. Lenders are maintaining wider spreads to make up for IFRS-related costs. IFRS takes effect at the major banks this fall and is raising the cost of securitizing mortgages, among other things.
  4. Investors are demanding higher returns as yields fall, which again motivates banks to keep spreads wide for as long as they can.

Barring a significant rebound in bond yields, it’s possible we’ll see the Big 6 cut advertised fixed rates any day now. Their “discretionary” (non-public) rates have already fallen.

Rob McLister, CMT

  1. I have both a fixed rate and a HELOC. The fixed is at 3.44% and the HELOC is at P – .5.
    For the last year, I have been trying to get TD Bank to lower my HELOC to P -1, but they will not.
    With the recent changes, do you think this may be allowed?

  2. Hi Dave,
    Depending on where you live, you might find a few lenders offering prime to prime + 0.25%. That’s for well-qualified new applicants. Those rates usually don’t apply to those lenders’ existing customers unless it’s a full refinance.
    That said, the market is currently at prime + 0.50% for a good HELOC and recent events do nothing to change that.

  3. Ravi, I still think variable wins over fixed rates. I’ve mortgage brokering for 7 years and variable has come out a winner in good and bad times. Right now, worst case..if prime does decide to go sky high, the variable rate SAVINGS you’ll have made in the first years of your term will compensate any hike going toward the end.
    I’ve written a blog post lately about going fixed, variable or a little of both! You can see it on my website.
    Daniel Gallant
    Mortgage Development Manager
    National Bank of Canada

  4. Hi Daniel,
    I am now going to take a mortgage. So would the variable be of any beenfit if prime is going to rise soon? I’m getting 3.70% fixed for 5 yrs and 2.15 variable.

  5. Ravi.
    I’m in a similar situation and decided to go with a variable mortgage rate. My rational is that in the current environment, the average monthly interest I will pay or the total interest paid over the loan term is less than if I went with a fixed rate. Now I could be wrong but I don’t think it will be by much.
    With regards to being uncomfortable with variable monthly payments, my approach is to pay my mortgage as if it were fixed with the extra gong to the principle. If the rate goes up, just reduce the excess amount going to principle accordingly. Thatsy approach and I’m comforyable with it. You should do what is comfortable for you and lets you sleep at night.

  6. OK. Let me put my 2 cents in here. If a person were to go variable right now in Canada, the prime rate at most banks, (if not all), is 3%. Most variable rate mortgages are prime to prime minus…whatever. For example my clients have been all getting Prime minus -.40 lately. Now you consider someone the fixed rate even as short a time ago as 3 years. It was closer to 6 percent. I know this for 2 reasons. 1st…I am a bank employee. 2nd as an employee I got a staff rate of 5.35 That was November of 2008 and it was 5/fixed. It was good at the time. But now for someone to hit the equivalent with a variable, prime would have to jump quite a bit. My clients would be at the same interest level if prime went to 5.75. The logic behind ALL of my clients taking a variable rate mortgage is pretty sound. We know the markets will shift and correct and become bearish and bullish. We know even that Prime will change, but there are 2 factors that help make the decision, the 1st is how quickly will prime change. I feel as an industry agent, that prime may go up at some point yes, but will do so more on the slow side. i.e; .25-.50 at a time. With the economic crises that the rest of the world seems to be in, there is no hurry by Mark Carney to warrant stalling our economy. The 2nd point is your amortization. When your variable rate changes, it means less goes towards the principal or more does if we see a rate drop. Most mortgages have a pre-payment allowance, (which lets be honest), is not always realistic for your average joe, but alot of mortgage also have the ability to increase payments, for anytime, for any amount usually up to 100%. The beauty part of it is you can go back to your original scheduled payment.
    If advisors are truly advising the best case scenarios for their clients, then they will be working on ways to restructure debt and take care of investment goals when they discuss the mortgage. That means with a better, ( or at least better than before you set a plan in place!), cashflow, why not take some and place it as an increased payment on your mortgage?
    Tell your clients to let the amortization work for them in the case of cash flow. They can always make larger payments later. This is why variable is so attractive right now.
    In truth I have not done a fixed term mortgage, (barring renewals), in over 2 years.

  7. I currently have fixed 5 yr for 3.5%. If rate falls further then i will look into option of blend/extend to defer my maturity date futher to get peace of mind as things may go other side.

  8. most of my investors or clients paying the mortgage off aggresively are leaning towards variable (as the rates increase over time but on a quickly declining balance, so overall interest paid is minimized) but 3.49% is still very attractive for a first time home buyer who will likely have a payment shock if the economy and rates go nuts. First timer’s aren’t very good at saving money and most borrower close or at the capacity of their qualifications, so it doesn’t give them much breathing room if/when prime rate returns to more normal levels. If fixed rates hit around 3% which based on bonds today it may, it would be hard to convince clients to go with your standard Prime – .75% variable rate.

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