rate war

Variable Rate War Heating Up

Mortgage shoppers looking to get a variable rate are in luck. The country’s biggest banks are currently slashing rates and clamouring for their business.

A week after BMO announced its 2.45% variable mortgage rate promo (prime – 1.00%) for new and existing clients, TD responded by matching the rate at a discount of prime – 1.15%, since TD has a higher mortgage prime rate than the other banks.

And now, mortgage rate comparison website RateSpy.com is reporting that Scotiabank is also quietly offering prime – 1.00% for new mortgage applications, and that HSBC will be announcing an even more aggressive prime – 1.06% (2.39%) offer as of Thursday.

“That’s the biggest widely advertised variable-rate discount ever from a large bank,” RateSpy founder Rob McLister wrote in his post.

RBC also joined the fray on Thursday with its own prime – 1.00% (2.45%) variable rate offer available until June 4.

So what’s behind these hot variable rate offers?

“Every spring we see the banks, trust companies and credit unions battle it out for mortgage market share,” RateHub.com co-founder James Laird told CMT. “Some years we see cashback offers, some years they focus on fixed rates and this year it is the variable rate.”

McLister suggested that because rising interest rates create more demand for fixed-rate mortgages, the banks may be trying to sell more variable rate product to balance their books.

Fixed vs. Variable Now a Tougher Choice

With government bond yields reaching 7-year highs, which in turn are driving fixed mortgage rates higher, Laird notes the spread between 5-year variable and 5-year fixed rates is now around 1.00%, the highest it’s been since 2011.

“When the spread is this wide, customers are more likely to think that the discount is worth the increased risk of a variable rate,” he said. “Customers understand that prime would have to increase four times in order for the variable rate they can get to exceed the fixed rate they could lock in at today.”

Mortgage planner David Larock tackled the fixed vs. variable choice in his latest blog post, writing, “the inherent uncertainty in variable rates remains, but its increased potential saving may now be worth the risk.”

In coming to that conclusion he examined whether the factors that are currently sending fixed rates higher will also lead the Bank of Canada to continue raising the overnight rate, which would in turn send variable rates up.

“…the BoC isn’t completely aligned with the bond-market’s assessment of the developments that are fuelling today’s rising inflationary pressures,” he wrote. “Furthermore, in my estimation, the rising inflationary pressures that are garnering so much attention of late are largely short term and cyclical in nature, and there are underlying deflationary pressures that are longer term and more structural in nature that I expect will reassert themselves over time.”

Despite the potential financial savings of going variable over fixed, Larock adds: “I’m not recommending that everyone suddenly take a 5-year variable rate, because there is no such thing as one-size-fits-all mortgage advice in my business.”

Story updated on May 17 to reflect RBC’s variable rate offer.