If you are confused about what is going on in the world of mortgage rates lately, you are in good company… so is everyone else! The reason for all the confusion is simple, all the moving parts are still moving and nothing has been settled yet… however the media is (as usual) reporting that the sky is falling.
Obviously the big question everyone has on their mind is “how does all this news on rate changes impact me”. For someone with a variable rate mortgage wondering if their rate will be going down, this is a good question.
Unfortunately, making sense of the current mortgage market is like having an opinion on a movie when you have only watched the first 15 minutes. It’s probably best to just wait and see. So here is my advice:
Don’t Panic. Everything will be sorted out in the next couple of weeks. Then we will know exactly what the recent bank changes mean and how they impact your bottom line.
Now, if you are a glutton for punishment and you can’t not watch the train wreck unfolding in front of you… here is a summary of the “Prime Rate Scandal of 2015”. The media has got nothing on me.
Bank of Canada
It started withe the Bank of Canada shocking everyone (including every single Canadian economist) with a drop to the overnight rate. I blogged about that here: Bank of Canada cuts Overnight Rate. Even people working at the Bank of Canada didn’t know the rate drop was coming.
The main point of confusion had to do with the misunderstanding that the overnight rate dictates the prime lending rate… it does not. Banks set their own prime rate, the overnight rate is simply one factor banks use in determining their internal prime lending rate. People assumed (most likely thanks to Facebook), that because the Bank of Canada lowered the overnight rate, they would automatically see a .25% rate drop in their variable rate mortgages. Although this may happen, it’s not guaranteed…
For more information on this, here is another article on my blog: How Does This Recent Bank of Canada Rate Change Impact Me?
Bank Prime Lending Rate
Now, TD was the first bank to come out and say they would not be moving their prime lending rate. RBC just released that they will be dropping their prime rate by .15% instead of matching the Bank of Canada drop of .25%. The other banks are still sitting on the fence. Will they follow TD or RBC, your guess is as good as mine.
<Amendment> And this just goes to show how fast things can change, according to the CTV news, it appears TD (who just days ago said they would be remain unchanged), BMO and CIBC have all followed RBC in dropping their prime by .15% instead of .25%. ScotiaBank and the National Bank are still on the fence.
Some of the media attention has gone for the banks throat and claimed that the only reason the banks wouldn’t drop their prime rate is “Greed”. And although I am biased towards the choice, connivence and council provided through brokers and I support broker channel lenders and love to point my finger at the big bad banks as much as the next broker… there are some reasons the banks might be slow to decide their next move.
Typically the Bank of Canada gives some indication that a move is coming… not this time. For the last 4+ years we haven’t seen a move in the overnight rate, it is understandable that the banks want to take a few days/weeks to assess what this move would mean to their bottom line. Remember, for banks the prime rate influences not just variable rate mortgages, but also loans and line of credits.
If there is one thing Canadians can count on, it’s that our banks make money. Unfortunately, it will be very suspect if they take this recent rate drop by the Bank of Canada, a drop intended to stimulate the economy… and increase profitability instead of passing on savings to consumers.
Now if you are an existing variable mortgage client of mine and your mortgage is currently with a broker channel lender like MCAP, First National or Street Capital, you might be thinking, why in the world do I care what RBC and TD are doing? Good question.
Broker channel lenders do not have a prime rate of their own, instead typically their mortgage contracts reference the prime rate of a major Canadian bank.
Enter more confusion… which bank’s prime rate? Another good question. Some broker channel lenders follow an RBC prime and some follow a TD prime and no doubt some follow another institution’s prime. Until now, banks have typically always followed the Bank of Canada’s lead with dropping and raising their prime rate. Usually one bank would drop and all the other banks would drop within a few hours or days and then the letters would go out indicating that as of (Insert Date Here) your new effective prime rate is (Insert Rate Here).
Completely Uncharted Territory.
So we are currently sailing in uncharted waters…
Canadians have never been in a situation where 2 different banks have had different prime rates.
What do we do with that… admittedly, this is pretty new to everyone. Obviously this is going to take some time to work out. Not only do we have to wait to see what all the banks are going to do with their prime rate, we have to then figure out which broker channel lenders are following which bank’s prime rate.
Ahem, So What About My Mortgage?
So to put it plainly, if you are a variable rate mortgage holder and you want to know if your rate will be going down, right now the best answer is… maybe. It completely depends on which bank your lender references for prime. And as all the banks haven’t made their moves (or non-moves) yet… there is no way of telling.
Although this may not be the answer you want to hear, my commitment to your remains the same… I am available to answer all your questions. And if I don’t know the answer, I will find out and let you know (even if that is a couple weeks later when everything settles).
Until we know more… turn off the news and don’t worry. It will all play out the way it plays out and I say this honestly, there is nothing we can do about it anyway. Enjoy your day!
If you still have questions, please contact me anytime, I would love to talk with you.