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Prime Falls (Finally)

The 24% of us with variable-rate mortgages were starting to get nervous. Six days had passed since the Bank of Canada’s (BoC’s) rate cut and many feared the banks wouldn’t pass along that savings.

Well, they did. Sort of.

In not-so-generous fashion, the Big 6 banks all cut their prime rate by just 15/100ths of a percent. That’s instead of matching the BoC’s full quarter-point drop—like they normally would.

This marks another first in the mortgage rate market. Canada’s prime rate, as tracked by the Bank of Canada, has never changed by less than 1/4 percentage point. Banks are telling us loud and clear that times are now different; their profitability matters more than convention (to them) and we can’t expect rates to do the expected.

In the land of fixed mortgages, the 5-year government bond yield (which heavily influences fixed-rate pricing) closed at an all-time low today, 0.76%. Add a typical 1.50 percentage point markup and 5-year fixed rates should theoretically be at 2.26% right now. Unfortunately theory and practice don’t always jibe in the mortgage universe. Count on lenders keeping margins inflated for the foreseeable future. If regular 5-year fixed rates drop below even 2.40%, it would be a win for consumers in this environment.

Sidebar: If you’ve got a variable rate mortgage and you’re wondering when your rate will fall, check your lender’s policy. Sometimes lenders apply prime rate drops the next day, sometimes it’s the next payment, sometimes it’s the first of the month and sometimes it can be up to three months later.

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