I’ve touched on before part of the reason banks have increased their Variable Rate Mortgages but wanted to pass along a recent press release from The Mortgage Brokers Association of B.C. (MBABC) outlining why there was such a quick increase to the discounts available.
Geoff Parkin, MBABC’s president answers, “Why could I get Prime minus .90 last week and today it is Prime minus .25?”
A great question, says the Mortgage Brokers Association of BC (MBABC), especially when fixed interest mortgage rates are remaining the same. The quick answer? As with many things, it all boils down to money.
Over the last couple of months, banks and other lenders have been offering historically low variable interest rates to qualified homebuyers in an effort to attract new clients and mortgage business. In the short term, lenders have been prepared to accept these low profit margins with the knowledge that, as the prime rate inevitably rises, so too will their profit on variable mortgages – a similar ‘loss leader’ tactic used by retailers to get consumers into their door.
“However”, says Geoff Parkin, MBABC’s president, “the recent announcement by Bank of Canada governor, Mark Carney has changed the mortgage lending landscape.” Carney stated that, because of poor performing global markets and continuing economic uncertainty, the benchmark interest rate would remain unchanged. The long-term outlook indicates continuing low fixed interest rates with no significant increases to the Prime rate. “In a nutshell”, says Parkin, “the bank’s theory of anticipating rising profits on variable rates was proven wrong. They’ve had to quickly respond to this situation by reducing the variable rate discount in order to gain back profit.”
What does this mean for consumers who have variable rate mortgages? Much of the same, says Parkin. “We continue to see low fixed rates and the variable rate is under 3.0%. There may still be value in going variable over fixed, but because consumers all have different financial situations and mortgage needs, we recommend they obtain expert financial advice from their mortgage broker.”