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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