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Variable Rates Going the Wrong Way

Variable mortgage ratesVariable mortgage rates are under some pressure. A half-dozen lenders, including some major banks and large non-bank lenders, have shrunk their variable-rate discounts by 0.10 to 0.15 percentage points in the last few days. Their going rate is now prime – 0.50%.

Lenders blame it on a combination of:

  • Shrinking mortgage spreads
    (Spread refers to the difference between what a lender lends at and its cost of funds. Spreads are reportedly being squeezed at some banks by a shortage of low-cost deposits.)
  • An overabundance of variable-rate mortgages on some lenders’ books.
    (Lenders like to keep fixed- and variable-rate exposure within certain parameters.)
  • One competitor following the other.

The takeaway here is that people looking for a deeply discounted floating-rate mortgage should snap one up soon, just to be safe. We don’t know how many lenders will follow this mini-trend, and very few provide advanced notice of rate increases.

Note that RateSpy currently lists the best variable rates at prime – 0.75% and lower. That’s 1.95% or less, given today’s prime rate of 2.70%. But keep in mind that many of the lowest variables today have higher-than-normal penalties (e.g., 3% of principal instead of 3-months’ interest) or refinance restrictions.

On a related note, RBC launched a new prime – 0.50% variable mortgage special this week. It’s somewhat uncommon for major banks to widely advertise floating-rate discounts that big. Perhaps RBC wants to hop on the opportunity to seize market share from its (now less-competitive) peers.

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