What’s Behind Banks’ Variable Rate Changes

variable-profit-marginsWhy did RBC and TD cut their variable rate discounts and spark an industry trend? Here’s the reason straight from the source (Dave McKay, Group Head, RBC Canadian Banking):

“A combination of factors in the price increase on Wednesday; one, there was a dislocation between the price of the fixed rate book versus the variable rate book which was encouraging, I guess, consumers to really move into a much, much lower variable rate book, which had very, very thin margins.

At the same time, we’re seeing a slight volatility in funding costs in the swap market. So, given the dislocation between fixed and variable the very, very thin margins, we felt we needed to move prices up in our variable rate book.

…I think the fixed rate business is well priced and earning a fair return. I think there was an anomaly with the intense competition in the variable rate mortgage business, consumer preference being, I think, artificially driven there because of the price differential to fixed, we had to get it back and to have more even keel. So, I think those were (summative).

Along with the funding volatility that we’re seeing, we needed to make sure that this product earns a fair return for shareholders. So, we moved rates up.”

Profitable-mortgage-spreadsIn other words, fixed-rate mortgages were oozing profit while variable mortgages weren’t paying the bills.

The fact is, if banks priced fixed mortgages commensurate with true funding costs (i.e. reduced fixed rates to match lower bond yields), more people would gravitate to fixed mortgages on their own.

5-year fixed money really should be closer to 3.00% right now (based on the cost of funds). Instead, lenders are exacerbating their variable-rate margin problems by keeping fixed spreads artificially inflated.


The above quote comes from today’s RBC earnings call. Conference call source: Morningstar.


Rob McLister, CMT

  1. i think reason number one was the main reason for the banks to cut their variable discounts………why go for a five year fixed at a ridicuously hi rate when u can go variable is the way people are thinking…hey banks, u want us to lock into your five year insurance policy so u can max your profits…..
    DROP THE FIXED RATES…well duh……

  2. “the fixed rate business is well priced and earning a fair return.”
    Ya. It’s fair if you’re the Cosa Nostra Bank of Sicily.

  3. here’s the real reason, in between the lines : “we needed to make sure that this product earns a fair return for shareholders”
    Shareholders wants profit. Guess where this profit comes from. You ! :)

  4. Where else is it supposed to come from? Lending money is a business, banks / financial institutions have shareholders to answer to, if you don’t like the fact they make money from interest, then don’t borrow money from them.

  5. high-larious — the costa nostra bank…fitting…
    i can remember going to ‘my bank’ as the commerical said back then for my mortgage..bank lady tried to ding me for a first, second, even a third mortgage even tho i had over 100k as a down on a $350k house…those were the ‘banking rules’ back then…went to a mortgage broker, got a mortgage at a lower rate than any bank and never missed a payment…cosa nostra indeed….right on bud…

  6. Keep in mind that in addition to raising variable mortgage rates, banks have recently increased pricing on bank accounts as well. TD just increased prices in August by as much as 20% on some accounts. A few months ago RBC said they’re open for additional fee increases in light of how popular their FinanceTracker has been with consumers.
    The modus operandi of the banks is simple: profit from debt. It’s ultimately up to the consumer to decide if they want to put up with it. Don’t like paying a fee for everyday banking? Switch to ING Thrive chequing. Tired of always wondering if you’re getting the best mortgage rate from your bank? Go an independent broker where everybody get a low rate. Tired of dealing with financial “advisers” who put your money in high-cost, low-return mutual funds run by the bank? Go see a fee-only independent adviser, many of whom focus on low-cost investment strategies through ETFs.
    The point is the consumers have a choice. Those who “get it” pay less fees and see better value for their money while those who believe in a magical relationship with their bank ultimately end up paying more to maintain that relationship.

  7. My two pence worth…
    Effectively, the banks are increasing their Adjustable rates…
    The fixed rate for any term up to 25 years are at the ultra low and the banks cannot make much money on that unless they also have other supplimentry business from the clients.
    By taking on variable rate clients they make their spread of profits plus IF the client decides to lock in in the future the rates for fixed are likely to be at the higher fixed rates than today’s ultra low.
    Masses have a physcological impression that because the fixed rates are at ultra low the variable will as is at ultra low.
    If the above argument is not digestable than why would all the banks still be discounting their variable, a week after annouincing their new (rates)policy?

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