I think it’s time to drop some knowledge on those who are asking 'Whats going on with mortgage rates?' Also, to perhaps educate those who are having a hard time following along.
Here we go:
So by now you all know the world seems to have gone crazy. Everyone is worried and confused which creates uncertainty. With that sentiment, comes panic and lots of misinformation. As it pertains to mortgage rates, yes, the Bank of Canada has in fact lowered it's 'overnight lending rate" (OLR), 2 times in 1 week which, in itself, is monumental. This is in an effort to boost inflation during this very "uncertain" time.
The lowering of this rate is meant to allow banks to loan money to each other at a cheaper rate to balance their books at the end of each day, which also means variable rate products such as mortgages, lines of credit, and variable rate car loans will also be lowering. The idea is to allow the consumer to have a few extra dollars to spend at their local restaurant, grocery store, mall, etc etc.
Variable rate products follow Prime rate, whether it be raised or lowered. Prime rate was lowered to 3.45% at most institutions as a result of the OLR lowering. This is where it gets a little confusing to some.
Banks set their own "Prime Rate" at their discretion so just because BoC dropped its OLR to .75% from 1.25% - it doesn't mean A) banks will follow suit and B) that banks will pass along this savings to us.
So while the Gov't decides to lower the OLR, it’s up to each BANK to pass that savings on to the consumer. Usually TD and RBC is the 'Prime Rate' that is the most referenced, but each are adjusting their Prime rate according to their own agenda for the most part.
Here is an example:
BoC decides to lower their OLR from 1.75% to 1.25% and most banks decide immediately or in a week to lower their PRIME rate the same 50 basis points (bps) from the current 3.95% to 3.45%. Prime has been sitting at roughly 2.2% above the OLR. If you have a variable rate mortgage, your rate dropped .50%. Beauty. Your next payment be lower (Unless you are at TD or another institution that fixes your payment) and therefore have a few extra dollars each month. When it comes to your mortgage rate, let's assume the rate you currently have is Prime -.75%, which means your rate is now 2.7%. ( 3.45% Prime LESS .75% = 2.7%.)
Now we hear the OLR was lowered again another 50bps to .75%, which means Prime rate also drops accordingly like the last time. Or does it? You see, the lender can choose to keep their prime rate at 3.45% for as long as they want, or as long as they don’t feel the pressure to drop. IF no other major lender is lowering their rates, they may just sit tight. However once one lender does it, most follow suit. Having said that though, just because the OLR dropped 50bps, does NOT mean the lenders have to pass that savings on to you. You still with me? If so, here’s what they can do:
A) Lower their prime rate only 10, 15 or 25pbs. This way, they keep the additional savings themselves. Remember, they can choose their own Prime rate. While most lenders pass the full savings on, some have been known to keep it to themselves.
B) Instead of offering new mortgage clients Prime less .75% for new mortgages, they simply offer all new clients Prime less .25%, essentially taking away the full discount that the BoC gave. This is them "raising rates" as the discount is shrinking to offset that 50bps drop.
ALL OF THE ABOVE - They can wait to lower prime as long as possible, then only reduce it a little bit AND take away the discount they offer.
Sadly, this is what most lenders will do. It’s all about making the most amount of profit so you can bet they will hold on to their money as long as possible. As of this writing, most lenders are still sitting at 3.45% and have not made the move lower. You can expect that in the coming weeks but nothing is guaranteed.
Well, did I lose you? If not, understand that this is ONLY the variable rates. FIXED rates are not directly affected by BoC lowering or raising their OLR . The fixed rates are decided by the bond yields and the cost, and supply and demand of Gov’t bonds. Sadly, that topic will have to wait for another day. Just know that the bond market is down, and so are rates. So get them while they're hot..
If you have any questions about this blog, or want to ask questions about your specific mortgage, I would love to hear from you. You may be able to benefit by getting out of your current mortgage, and into today's low rates. In a lot of cases the savings are enormous when rates are this low. Yes, it is likely you will have a penalty to leave your current lender, however we will run the numbers to see if paying a penalty (which comes from the equity, not your bank account) is worth making the switch. You just may be surprised on what you save.