More From the Rate Front…

Borrowers got what they were asking for. It just wasn’t as big as they were asking for.

The major banks cut their prime rates by just 15 basis points today, to 2.85%. It’s the first time ever that Canada’s official bank prime will have changed by less than ¼% (at least back to 1935 when the Bank of Canada started publishing this data).

RBC showed leadership by being first out of the gate with its prime rate announcement. Then came BMO 50 minutes later, follow by the rest of the pack.

This all comes after TD Canada Trust worried borrowers last week, telling them it wouldn’t cut prime rate at that time.

In a statement, RBC characterized its unorthodox 15 bps cut by saying:

“We believe our announcement is a balanced approach which reflects our actual cost of funds and helps clients save money on products such as variable-rate mortgages, lines of credit and floating-rate loans…Our decision was driven by a number of factors, including our wholesale funding costs, the competitive, operating and macroeconomic environments, and the Bank of Canada’s recent rate decision and its impact on other market rates across the yield curve.”

Some other rate observations of note:

  • Last time the BoC cut its overnight rate banks followed suit within 60 seconds. This time it took six days. Anyone notice?
  • This isn’t the first time an individual bank has dropped prime by less than a quarter point. TD Canada Trust and CIBC did it in October 2008, but none of the other Big 6 followed suit, so Canada’s prime rate officially fell by 25 bps. (TD and CIBC later gave back that 10 bps by lowering their prime to 4.00% just 11 days later.)
  • The 5-year bond yield, which leads fixed mortgage rates, closed at another record low today: 0.76%. If this level were to hold, the theoretical “fair value” for a deep discount 5-year fixed rate would be in the 2.25% neighbourhood.
  • TD’s 3.09% is the lowest widely advertised five-year fixed rate of any major bank. Yet, TD was at 2.99% back in June 2014 when the 5-year yield was 80 bps higher. (Don’t try to figure that out. It’s the new math of the mortgage market.)
  • Markets are now pricing in a 61% chance of another rate cut in March. (Source: Bloomberg)
  • The Bank of Canada reminded everyone of how banks actually work, telling Bloomberg: “Financial institutions set their prime rates based on a number of factors, including the cost of short-term funds and competitive pressures…It is up to the management of these institutions to decide what to charge their customers.”
  • Here’s what the Department of Finance (a Department of few words) had to say about the banks’ moves on prime: “That is a decision for the banks to make.” (via The Globe and Mail).
  1. Great article Rob. We definitely live in interesting times!

    Any thoughts/comments on why the banks are pricing in 80-90bps more than they were last year, on the 5 year fixed? Curious for your take on that.

    1. Margins are already very compressed and last time they went under 3% they got an earful from the Feds about not fueling the debt bubble further. Remember Manulife reneging on their sub-3% offer shortly after a call from Flaherty?

    2. Thanks Conrad, Lenders have a host of considerations before they lower rates, ranging from competitor pricing, to funding spreads, to protecting their pipeline, to extra capital costs, to hedging costs in a volatile market, to appearing prudent in a higher-risk housing environment. But given enough time, the forces of competition will bring fatter mortgage discounts.

  2. It’s an exciting time for the spring market because it’s a borrower’s utopia…. Two wholesale lenders already dropped their prime this morning effective as of tomorrow. I agree with the assessment on fixed rates, they’ve been making crazy margins for a few months now.

    1. Utopia may be a little bit of a stretch, but as a real estate investor, I am certainly pleased with the direction that rates are going. I have a rental property coming up for renewal soon and it looks like the monthly rent will be paying down the mortgage even faster than before, which I honestly didn’t think was possible 2 years ago.

      Even still, I must say that I am more than a little perturbed that variable rates and especially fixed rates haven’t moved down nearly as much as they should have, especially in light of the fact that the 5-year Canadian bond yield hit a new all-time low of 0.67% in intra-day trading today.

  3. It’s a borrower’s utopia alright. It’s the worst possible time to borrow money, *ever*. The proportional increase in home prices due to easy money has been illustrated among the blogosphere at infinitum. The risk of these prices dropping is at an all time high, whether it’s the risk of interest rate increases upward from 0, or just general peak debt/debt fatigue from the Canadian masses, you’d have to be a plain idiot to borrow money right now for purchasing these overpriced assets. Good luck!

  4. Don’t be concerned, I’m sure the brokers that are pushing prouct – er, sorry, offering sage financial advice – right now will be there for their clients once they’re underwater and can’t afford their payments.

    1. Re: @ Concerned & @ Guest:

      Looks like eating crow for the last decade or so has a couple of the bears in a bad mood. Perfectly understandable.

      If you need to vent go right ahead, just remember to have that rent cheque ready for the end of the month, which is fast approaching.

        1. Responsible borrowers are taking advantage of the current interest rate environment to aggressively pay down debt. Last year 190,000 mortgages were retired. This year it will be another 190,000, or more.

          Personally, I am not lowering the monthly payments on any of my rental properties, regardless of how low rates go. But I will be increasing the rent.

          People who are lousy with money are lousy, no matter what interest rates are. I simply can’t help the irresponsible ones, but they have always existed and they will continue to exist even when interest rates start to rise. Imagine that.

          To think that low rates entice smart people to act irrationally is childish nonsense, perpetuated by financial “geniuses” the likes of Garth Turner and other shills who have their own agendas..

          P.S. “fuel for the fire” is hyperbole & so terribly cliche’, let’s try to be a little more creative and relevant with our critiques, shall we?

          1. Appraiser, I don’t question your fiscal responsibility, but I’m not naive enough to think you are the norm. I’ve got a mortgage on my principal residence so I take no joy in the possibility that I now think the housing market could potentially take a hit. I’m prudent in keeping my TDSR in the 15-18% range max, but I’m not naive enough to think that is the norm either. The lowest rates in history won’t be around forever and there will be consequences at some point.

    2. Guest: I noticed you hurled your baseless ignorant comment specifically at brokers and not banks. Is that because you’re both biased against brokers and clueless?

      1. Did you have something useful to add to the conversation? Banks were holding steady on prime while brokers complained about it.

  5. Be very prudent when underwriting deals in this low rate environment. Document, document and document…if its not on paper, let it go…

  6. Rob,

    You better change that Prime Rate on your home page. I don’t want to see anyone on here suffer through any PTS – like trauma when they still see that 3.00% under Key Interest Rates.

    1. GHB, CMT pulls prime from the BoC’s website, which isn’t updated yet. Nonetheless, to avoid numbness, debilitating flashbacks and other PTSD symptoms, we have updated it manually to 2.85%.

      1. LOL

        Appreciate your website very much Rob, I spoke to you on the phone almost 5 years ago and quickly determined variable was they way to go for us. The short conversation also helped us decide to go through a broker rather than our bank – only because you were so willing to offer such sound advice so freely. We couldn’t have made better decisions. Finding a good broker translated to an incredibly stress free renewal, and now we wouldn’t go any other way. The best rate isn’t everything. Thanks for all you do.

    1. Does anyone have any advice on breaking a 5yr fixed rate mortgage with 20 months to go? Our current rate is 4.271. Coast Capital said the penalty would be at 12K! Should we talk to a broker about renewing/refinancing? I don’t want to waste a brokers time if it isn’t a good idea to break it.

        1. Prepayment options are 30% of original amount any time once a year and up to double up payments. But, I don’t think they allow for the 30% prepayment to be deducted before calculating the penalty. When i used the prepayment option to calculate it, i came to around $9000. We have the option to blend and extend, but the blended rate would be around 3.27 for 5yr fixed. Still a great rate, but not as good as what is out there. My husband wants to break it and go with a variable. I am not sure paying the penalty is worth it

          1. It sounds like you have the Your the Boss Mortgage? I have the same. I think your best option would be to wait 8 months until you are close to the one year date then get a bridge loan for 60% of your mortgage. Using the bridge loan funds to pay down 30% of the mortgage one day before the 1 year mark and then 30% down the day after. And then break the mortgage and get a new mortgage. That will save you 60% of the penalty ($5400). Also, the 1 year fixed rate is higher than the 2 year fixed rate so there will be a slightly lower interest rate differential and you will save you closer to $6500.

          2. Just for reference. I can tell you how they calculated your blend and extend rate. Basically, the calculated your interest rate differential with the assumption that you made a 30% prepayment and then blended that differential into the new rate. I.e. they blended $6300 into the new 5 year interest rate.

      1. Hi Guest,
        Depending on your mortgage balance, it might be profitable to pay the penalty and refinance at a lower rate.

        1. mortgage started Oct 20/11 – $550,592.00 30 yr amort, accelerated bw payments of 1351.66, matures Oct 7/2016. We would like to get a variable rate 5 yr with 18 yr amort. current balance is 510,705.00 BUT we would also like to max our mortgage back to 80% LTV – we owe family money, so we are probably looking at adding another 40k

          1. Hi Guest,

            Did you ask your bank about your penalty charge? It’s the most important factor in determining the profitability of a refinancing strategy.

  7. I got 1.99% variable mortgage from Investors Group back in July 2014. I am waiting for it to reduce its prime rate, but so far there is no any change yet :(

  8. So the banks are not following the Bank of Canada prime rate… How can this be legal?

    Can the banks just arbitrarily set their own prime rate?

    What if they said their prime rate was now 10%, and they expected to cash in on all those variable mortgages? Presumably that wouldn’t fly.

  9. Good evening everyone!
    I just ended a call from my RBC advisor trying to convince me locking in a fixed closed 5-year term mortgage since ours is due for renewal in June. It has been the 2nd call already in one week.
    My husband and I tend towards a variable one this time or at least wait up until March and hope that the Prime will drop down again to get an even lower fixed rate. I mean why would they be so persistent all of a sudden if there wasn’t something like that to be expected with the economy and the $ to be so down??
    What is your guys’ opinion on that??

    1. Hi Tanja, The sooner the bank gets you to re-commit, the less risk there is of losing you. They may also foresee falling rates and want to lock you in beforehand, but that’s just my speculation.

  10. I made a down payment few weeks ago and now have to decide if I should go with fixed or variable. I was offered 2.25 on variable and 2.69 on fix rate . It is my first time buying a place. Mortgage broker and bank rep recommend go with variable . And i just don’t know what to do. Any advice would be appreciated.

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