Variable Discounts Quickly Evaporating

Deadline-for-variable-rate-mortgage-discountsIf you need a new variable-rate mortgage, call or email a mortgage advisor pronto.

Multiple banks (CIBC, RBC, TD, Scotia) are slashing variable discounts again, effective tomorrow.

Second-tier lenders probably won’t be too far behind.

Banks seem dead-set on herding borrowers out of low-margin variable rates. Spreads are simply not profitable enough—at least compared to succulent and juicy fixed-rate margins.

When the dust settles, we’re hearing estimates of variable rates on the street moving to prime – 0.40%, or perhaps prime – 0.50% for aggressive lenders.

New borrowers now face a decision:

A 2.50% rate that moves (i.e., variable)


A 2.49% two-year, 2.99% four-year or 3.29% five-year rate that doesn’t (i.e., fixed).

Consumer psychology being what it is, there will certainly be a giant shift into fixed-rate mortgage originations, given this new pricing.

Tomorrow we’ll analyze whether that’s a good decision.

Note: That “shift” refers to new borrowers only. It does not mean that existing variable-rate holders should consider locking in.

Rob McLister, CMT

  1. Many thanks R…
    We’re stuck quoting nationally-available rates due to our audience, but you’re right; there are regional rate differences and prime – 0.70% (or better) is still possible in some places, for now at least!

  2. To think that CIBC was giving P-0.5 WITH 3% CASH BACK* just a few months ago…. :)
    *subject to 20% max prepay per year, and full clawback if mortgage is terminated early

  3. Spread widening is likely to be relentless in the coming years. After all, the CMHC has promised to pick up the pieces if this ends up inducing any defaults.
    Should be very good for bank profitability. CMHC insurance allows the banks to burn down the houses (ie: devalue them through credit contraction), and still collect the insurance money!

  4. It’s a logical move for the banks. Variable mortgages were priced at prime – .75% or less with anticipation that interest rates will rise (in accordance with the banks’ own projections, it’s not easy predicting rates after all). However, with the Fed announcing they will keep rates low until at least 2013 and the Bank of Canada likely won’t raise rates until much of the current volatility in the markets subsides, lenders react by raising the decrement on variable rates. I don’t think it’s necessarily done to “push” people into fixed rates products because the market is quite competitive with fixed rates. It’s more to bring the pricing up to reflect the increase in the cost of funds for the banks.
    Consumers may not be entirely aware of this but there’s quick a bit of volatility in the credit markets with banks in Europe seeing their credit rating slashed due to their exposure to PIIG debt. CDS indices are clearly showing increased volatility. Should the crisis spread past Europe, and I personally believe it’s only a matter of time before it does, we could see prime minus variable mortgages become ancient history and HELOC rates would also increase, leaving many borrowers who carry large balances on their HELOC facility scrambling to either convert to a fixed position or pay it down before rates increase even further. It happened in 2009 and you can bet it will happen again should another credit crisis unravel.

  5. If you don’t like it, don’t borrow. Or buy shares in the banks since this “greed” you perceive should ultimately lead to better shareholder returns, no? The defenseless victim comments from so many borrowers are really getting old. Banks are in the business of making money, not subsidizing everyone’s desire to live now, pay later.

  6. Banks are a business, and the object of business is to make money. Stop acting like the banks are a social service that have no accountablility to their bottom line. As someone else said, don;t like it, don’t borrow.

  7. Hello Lior,
    Pardon my naivete but why would it matter to variable rate discounts if prime rate increased? Doesn’t the cost of funding those mortgages rise accordingly? I thought variable spreads get narrower right before prime rate increases, and then adjust to stay the same as before the increase. Other things being equal of course.
    I would also think rising rates would cause people to lock in which is very profitable for the banks.

  8. Government regulated Cap on the spreads that banks provide is a very good idea I think. So no bank can go over that. And eliminate this “Posted Rate” and “Promo rate” madness … One rate – like ING – that should be all. Whatever you get is the posted rate – one rate. Sounds fair to me. Banks have their guaranteed profit, people have no tricky conditions and huge IRD amounts.
    RBC for example has a clause in their fixed term mortgage agreement : “We can at any time change a fee or charge a new fee without notice to you”. How crazy is that ?

  9. Jim,
    Most consumers who have a variable mortgage tend to stick with it regardless of where interest rates head. While the breakdown of fixed and variable mortgages right now is about 65%/35%, the market share of variable mortgages has been distorted in the last 18 months as consumers were lured by very low rates. While a 5-year fully discounted fixed rate can be secured for about 3% these days, a year ago that same rate was higher (around 4%) and variable mortgages were around 2.25%. As such, it’s not surprising that consumers who under normal circumstances opted for a fixed rate decided to role the dice by going variable.
    What’s behind the rate increases we have seen? It’s not so much the banks trying to push people into a certain product but more of a realistic reflection of the increased volatility that’s present in the credit markets and that’s pushing up the cost of funds for the banks. While geographically we’re far away from Europe, the international banking system is tightly linked and when there’s continuous fiscal volatility in one part of the world, it makes the markets nervous and the cost of borrowing goes up to reflect the higher risk. If anything, the very low fixed mortgages rates we’re currently seeing are a by-product of all this nervousness as investors shift more of their money into safe havens such as gold (which is at record highs) and government bonds (which pushes down the yield that these bonds pay).

  10. …..defenceless vic? hardly….went to a mortgage broker, stayed away from the banks, and never looked back….chill out there, mr. banker….
    I realized early in the game that banks were definitely NOT the place to go to get a good mortgage…

  11. That’s crazy? What about the penalty that people have to pay to break a fixed rate mortgage? The penalty amount is the greater of 3 months interest or the interest rate differential (IRD). It essentially means giving a blank cheque to the lender to charge you whatever the hell they want and you have absolutely no say over the amount. Keep in mind that there are no government regulations about how the IRD should be calculated and the penalty is designed in a way to bring the lender the maximum amount. That’s another good reason why brokers have traditionally recommended variable rate mortgages; they’re cheaper to discharge (most of the time at least).

  12. It’s simple; if you don’t understand the mortgage contract terms, solicit the services of someone who does. If you don’t like the terms, don’t sign the contract. Suggesting the government end the free market and essentially take over banking in this country is ludicrous!

  13. Hi Lior,
    You’re absolutely right about credit market risk increasing and you can see it in the “TED spread.” (A common indicator of credit market risk)
    But it hasn’t been a huge increase (yet), and it hasn’t been proportionate with the shrinkage in variable discounts. That said, there is absolutely an anticipation of further risk that’s being built into spreads right now.
    Here’s a related article from the Globe.
    The biggest driver remains insufficient interest margins. Bank no longer want to accept tight spreads in variables relative to fixed. It’s no accident, for example, that Scotiabank priced its 2-year fixed at 2.49%, one basis point under its variable at the time.
    Banks want to earn a better markup on variable-rate money or, better yet, get borrowers into more profitable fixed terms, and from a business standpoint who can blame them?

  14. So you apparently found a good broker that has a product selection that meets your needs. So what? your personal experience is not necessarily indicative of the market. A larger majority still find their needs better served by their FI! be it a C.U., virtual bank or their local high street bank. (Source: market share)

  15. its good that people can do a lot more shopping around for mortgages…back when I first bought you ‘shopped around’ at this bank or that bank…..there just didnt seem to be the variety, the choices there are now and for that I am very thankful…banks trying to lure me in now with nice low four year rates and then what when the four years end then what?…their rates are back to their high rates and you have to pay a major penalty to escape…no thanks

  16. If you fulfill your four year term, what major penalty are you referring to? Unless you are in a collateral charge (TD), you’re free to leave at renewal. I could be wrong, but even if you are in a collateral charge I don’t think the legal fees to leave are that “major”. If the bank you’re with then wants to keep your business, make them play ball. Tell them they can either pay a broker a finder’s fee on your business or show you some rate love. By all means, shop around online and see what rates are out there, but to say you can’t get a “good” mortgage without a broker is ignorant.
    Now, brokers can certainly serve other purposes for the unfamiliar (term advice, etc), but you seem to be focused on rates as your logic for using a broker.
    And no, I’m not a banker, but nice guess.

  17. No doubt.
    Every single thread np comes on and bemoans the fact that he can’t get money for free because the “banks are greedy”.
    Give it a rest.

  18. You can get Prime for a year with one lender.
    Best bet thought would be Prime minus on the amount you will be borrowing for an extended period of time (to get about 1% better on the rate) and adding the LOC behind it for the re-advanceable flexibility.

  19. Wow this thread got heated fast…
    Anyways, to answer Ming’s question, market volatility often hurts variable discounts but helps fixed rates because of the way they are priced. The “cost of funds” applies to both. Currently the cost of funds is rising but BOND YIELDS are dropping more quickly, hence the decreasing fixed rates.
    Scared money is running to more secure investments like bonds and lower bond yields means lower rates for clients.
    In fact, as Rob has mentioned in perivous posts, fixed rates should actually be below 3% if it wasn’t for the increase in cost of funds. This ~.4% rise in the cost of funds has hit variable rates on the chin, but bond yields have dropped about .8% at the same time, hence the drop in fixed rates by about .3%.

  20. Frankly, market share means little. Most people buy mutual funds with 2.5% MERs instead of ETFs at < .5%. Does that majority make mutual funds a better investment? Of course not. Same with brokers. More people go to banks because banks hold their chequing accounts and have huge branding power. That doesn't make them better. I have played the game and called all the banks myself, only to find I've consistently got lower rates and better advice from my broker. Being in the financial industry I would never dream of going to one bank for my mortgage. That is like going to a financial planner who only deals with one mutual fund company.

  21. Sorry, you lost me when you said “market share means little” Collectively in business, EBITDA, market share and corporate responsibility is everything.

  22. banker, I’m not surprised you’re against regulation, you’re a banker :).
    Now about contract terms :
    Yes, I think government should regulate those to make is normal and fair. There are some ridiculous clauses there, saying : “You’re nothing and have no rights and we can change these terms as we like at any time “.

  23. Lior, I think you didn’t understand my post and what’s wrong with the IRD is not how it is calculated, but adding there the “Rate discount” – the difference between Posted and the rate you have.
    Simple example : 100 K remaining mortgage with same rate with RBC and ING. With RBC IRD is double than what is with ING. Only because they have “Posted rate”-“Your rate” in the equation.
    So – yeah, I also think IRDs with the big banks are ridiculous.

  24. i meant breaking early if you can see that bank rates spiking up….
    as rob on this site said — banks take the express elevator to the top on rates and escalator down…nice analogy….point is I use banks daily, since I was nine, but havent and would prob never use them for a mortgage…far too many other, better rates elsewhere…

  25. I don’t think Mark’s point is that there should be no IRD. It is that it should be regulated to avoid the monkey business the bank pulls re: discount rates and comparator rates. Just today the bank was trying to convince me that I should be compared to the three year rate, when I have 46 months left on my contract and obviously the four year rate is the next closest.
    There should be a penalty for breaking your mortgage contract. Otherwise they’d be meaningless. But they should be clear.

  26. I am by no means a financial whiz…four years ago I took out my mortgage on a five year fix for 5.34% at that point I needed stability and I needed to know what my payments were going to be. I still have 11 months left on my mortgage. After work my bank called and offered a blended mortgage to me, no fees, just sign, for another five years at 3.9%. As soon as I hung up the phone I received a call from another bank I deal with offering 3.6% five year fixed term….but with them I would have the penalties and legal charges. I am tempted to take the 3.9%. At present I can easily handle my payments and this would take five years off my mortgage….or should I wait until next year and renew then, keeping in mind I am paying 5.34% at the moment…I have to know by tomorrow afternoon…pressure sales.

  27. I won’t do it, if I’m at your place.
    You can take 2.99% for 4 years. Paying the penalty now will probably save you more on the long run. 1% difference, do the math and decide. It also depends of your remaining balance.

  28. but I’m by no means a professional mortgage specialist. And after all, it’s whatever makes you feel comfortable. 3.9% is lower than 5.34, so, You’ll save for sure over next 11 months.
    All I know is when a bank pressures you for a deal it’s most of the time because they’ll benefit from it :).
    Good luck !

  29. It depends on your penalty. Find that out and then ask a mortgage pro to calculate the savings and breakeven time of four year fixed at 2.99%. It doesn’t make sense to pay 3.60% or 3.90% for five years IMO.

  30. Carol – Why don’t you email Melanie or Rob McLister and ask them since they are professionals. I have recently been dealing with Melanie to help me refinance my condo and get me a preapproved rate since we are on the hunt for a house (going to keep our condo to rent out). She was awesome and really helped us to find the best deals. I am in Toronto and they are out in Vancouver but in these virtual times, I had no issues.

  31. I think another issue is that many consumers don’t really understand what mortgage brokers can do for them. Historically brokers were always thought of as people you go to if you didn’t qualify for a mortgage with a financial institution. Over the past decade, however, brokers started taking a lot of business from the banks and that’s why the brokers’ market share went from less than 5% in the early 90s to about 35% to 40% today. Still, there’s much room for improvement and I don’t think that fighting with banks over rates is a particularly smart strategy to originate business. The reality is that banks who have partnered with brokers and provided the products to compete have seen incredible success while those that haven’t lagged behind (i.e. BMO, HSBC, etc.) For example, a lot of ING’s mortgages are originated through brokers (I don’t want to post specific % but it’s quite sizable). ING spent years building very strong relationships with the brokerage community and brokers in return have reciprocated by making ING one of the largest mortgage lenders in Canada and a formidable competitor to the major banks.

  32. Carol, You and other posters may find my story interesting. 18 months ago I obtained a variable rate mortgage with RBC at prime less 0.2% for five years. About 3 months ago I informed them that I intended to transfer to a broker who was offering Prime less 0.85%. RBC offered to match this and I accepted. Penalty cost was $375. Needless to say, I am delighted and found the whole experience to be positive

  33. Well done. You used a broker who quoted a great deal in good faith and then took it to a bank who was more than happy to screw you over had you not called them on it.
    PS. The bank also bent you over on that prime-.2% and gave you $h.t advice the first time. Good on you to reward that behaviour.

  34. Well obviously, but np said “banks trying to lure me in now with nice low four year rates and then what when the four years end then what?…” – hence, implying full commitment of the contract.

  35. Thx ! Most lenders charge setup fees … as far as I have checked. I found at Prime but 600 $ setup fee and I plan to use the HELOC just in case of an emergency

  36. If you feel you are a victim of pressure sales tactics, don’t cooperate or concede. Would you find this approach acceptable for any other kind of product? Why buy into it in this circumstance? If someone is taking this tactic they most likely have a reason that will benfit them more than you. Beware the collateral charge!

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