Shell Game: The Bank of Canada has hacked 150 bps off its policy rate in just 23 days. Banks have matched the entire drop with 150 bps of prime rate cuts. BoC Governor Stephen Poloz said that was vital to “cushion” the COVID-19 “blow” for consumers. And, if you only considered banks’ prime rate reductions, they’d look quite charitable. But, by this time next month, we suspect banks will have slashed variable-rate discounts off prime by over 100 bps. In other words, while existing variable-rate borrowers are seeing their borrowing costs dive by 150 bps, new floating-rate borrowers are getting the shaft. (Read below on why banks aren’t totally to blame.)
Variable Alternatives: If you’ve become disenchanted by stingy variable rates, here’s a few solid substitutes:
TD Makes Three: TD Canada Trust is lowering its prime rate as well. Effective Monday, TD’s “Mortgage Prime,” which is 15 bps above the other banks’ prime rates, will drop by 50 bps to 2.60%. Almost all other mainstream lenders will be at 2.45%.
BMO Makes Four: Bank of Montreal is also lowering its prime rate by 50 bps on Monday.
CIBC Makes Five: The nation’s fifth largest bank said it will also drop its prime to 2.45% on Monday.
6:53 p.m. Update
Scotia Matches: Scotiabank has equalled RBC’s 1/2-point reduction in prime rate. The bank’s prime will fall to 2.45% on Monday.
Prime+ Variables: This drop in prime will squeeze bank profit margins further for all sorts of reasons: (A) deposit rates can’t fall by a similar amount and deposits are a vital source of floating-rate funding, (B) big-bank deposit bases are shrinking, (C) banks are being forced to put aside more money for loan losses, and (D) investors fearing credit risk are making banks pay much more than normal for their funding, despite government efforts to restore mortgage liquidity. For these reasons and others, there’s a good chance banks will keep trimming variable-rate discounts to compensate for today’s 50-bps rate drop. Some lenders will now charge prime rate plus a premium (e.g., prime + 0.25%). Fortunately, existing floating-rate mortgagors are immune from that madness and will enjoy the full benefit of today’s 50-bps reduction.
6:12 p.m. Update
RBC Cuts Prime: The nation’s largest mortgage lender is leading the way again with a 50-bps drop in its prime lending rate. The change takes effect March 30, 2020. The rest of the Big 6 banks should fall into line today or early next week. This is the third cut in prime rate in one month, which is virtually unprecedented. If the other banks match as expected, it’ll take Canada’s benchmark prime rate down to 2.45%, a level we haven’t seen since 2010.
3:15 p.m. Update
Sign of the Times: BMO Bank of Montreal boosted some of its advertised specials by up to 40 bps today:
Non-prime Omen?: When economic times get tough, some of the greatest default risk comes from borrowers with weaker credit, higher debt ratios and/or less stable income. It’s notable then that GIC rates are surging, particularly at Canada’s top non-prime lenders. The likes of Home Capital, Equitable Bank and Canadian Western Bank have lifted their 1-year GIC rates 65-75+ bps in the last few weeks (despite 150 bps in BoG rate cuts). That’s according to data from noted housing analyst Ben Rabidoux. We’ve reached out to the companies for comment on whether they’re having trouble attracting investors at normal rates. If they are—and it looks like they are—it’s another sign that crisis-driven illiquidity will push rates up for borrowers.
Noble Lenders: When the mortgage broker industry’s main application submission software went down this week, it couldn’t have happened at a worse time. Customers were rushing to apply as rates were surging. Well, some lenders have a heart. A number of them kindly agreed to honour their old (lower) rates so broker customers weren’t disadvantaged by this technical glitch. That’s almost unheard of in the mortgage business and said lenders deserve a lot of credit (there’s too many to list here).
Commercial Gridlock: “[Non-bank commercial lending] firms including Vancouver-based Trez Capital have gated open-ended funds indefinitely as the underlying assets can’t be sold fast enough to keep pace with sustained withdrawals.” More on that. Give it time and we’ll almost certainly hear similar stories from multiple residential mortgage investment corporations (MICs) and private lenders.
e-Signature Wake-up Call: Pre-COVID-19, there were several lenders who didn’t allow e-signatures. Now, some of those dinosaurs are finally seeing the light and discovering that e-signatures are enforceable. In 2020, ink is dead and customer convenience is paramount. Forward-thinking lenders transitioned to e-signatures several quarters ago.
11:57 a.m. Update
Prime Watch: We’re now waiting not-so-patiently for banks to announce Canada’s new prime rate. RBC was the first to match the @bankofcanada in the last two rate cuts and all the other banks followed.
On March 4: The BoC announced at 10 a.m. and RBC took over six hours to announce its new prime rate.
On March 13: The BoC announced an emergency cut on this Friday afternoon and RBC waited until 3:42 p.m. ET the following Monday to announce.
Few Discounts Left: Variable-rate mortgage discounts are still doing the disappearing act. Online rate leader motusbank just hiked its 5-year variable rate from 2.59% to 2.85%. That leaves Canada Life with the lowest nationally available conventional variable rate, at prime – 0.25%.
No Exception: With the economy in a tailspin, we’re seeing more lenders limit underwriting exceptions. In such cases, borrowers who don’t meet a lender’s standard guidelines are simply being declined as lenders triage huge backlogs of applications.
Trudeau: “…The Finance Minister has had conversations directly with the banks about credit-card interest rates…We are encouraging them to take action to alleviate the burden for Canadians.” (Globe)
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