More thoughts on the prime lending rate cut

On the heels of headlines forecasting ‘inevitable interest rate hikes’ came (from left field for many journalists, less so for many Mortgage Brokers) the announcement of a 0.25% rate reduction to the Bank of Canada’s overnight lending rate.

The majority of mortgage brokers found themselves spending the first two work weeks of 2015 calming clients in the face of multiple headlines forecasting interest rate ‘shocks’ ahead.

In turn, the past weeks were spent explaining to variable-rate clients the subtle, yet important difference between the bank of Canada’s Prime rate and their mortgage lenders’ ‘Prime’ rate.

Lenders base variable-rate mortgages on what is referred to as their own internal prime rate. Although historically lenders have moved in lockstep with the Bank of Canada decisions, there was some initial reticence to lower effective interest rates on current variable-rate mortgages and after nearly a week without movement lenders reduced their internal prime rate from 3.00 to 2.85% sharing some of the Bank of Canada’s reduction with variable rate mortgage and line of credit holders, but not all of the rate reduction.

One important point is that the Bank of Canada’s Prime rate is specifically NOT used to qualify clients for mortgages.

In other words, Canadians do not currently qualify for any more mortgage debt today than they did the day before the rate reduction announcement. Accordingly this reduction in interest rates does not directly strengthen purchasing power for home buyers, and thus should do little to add more fuel to real estate values.

It is further worth noting that, historically, as lenders reduce their own prime lending rate on variable-rate products, the discounts offered on these products – mortgages, lines of credit, etc. -tend to be adjusted upward, negating any potential gains for new mortgage applicants.

Existing closed variable-rate discounts will of course continue to be honoured until the end of the client’s mortgage term.

In short, although this rate reduction may bode well for clients currently in a variable-rate mortgage, it may not be of significant net benefit for clients applying for a variable-rate product in the coming weeks. Although today we have both deep discounts on variable rate products, and the new lower 2.85% Lender Prime rate. New applicants may have their cake and eat it too.

Fixed rates, although largely dictated by the bond market, have been edging downward since Jan 5th.

Despite this material and documented decline, there had not been a major headline noting this. Rather headlines were largely promoting the opposite of what was occurring in reality. The day that the Bank of Canada announced the cut of 0.25%, the bond market saw a (then) record low of 0.83% and has since dipped below 0.60%.

This has created significant increases in lenders’ fixed-rate profit margins, and arguably calls for further rate reductions to fixed-rate products, in particular the five-year fixed-rate mortgage.

However, as with the cut to prime, lenders have thus far been slow to respond. Offering 0.05% and 0.010% reductions and reaping the increased profits. Lenders remain unlikely to make any significant moves until one breaks ranks.

With strong property values coupled with strong sales activity in most major markets, there seems little incentive – or fundamental desire – on the part of lenders to reduce rates further.

What is evident at this time is that variable-rate clients will continue to be the big winners into the foreseeable future, and those clients who prefer a fixed-rate product will also continue to benefit from historic lows as well. It should be a very busy spring market!

Jean-Guy Turcotte is a mortgage broker with Dominion Lending Centre – Regional Mortgage Group in Red Deer.

Just Posted

Ronnie Dixie gets another chance at life from a liver transplant

Red Deerians invited to annual Stroll for Liver charity walk June 3rd

Trial for man accused of 2006 Eckville murder “unreasonably delayed”

Lacombe’s Shayne Gulka is awaiting trial for the 2006 murder of Bradley Webber

Individuals face 84 criminal charges related to stolen, counterfeit credit cards

Investigation and search warrant executed collaboratively by Red Deer and Sylvan Lake RCMP

Red Deer’s Stephanie Essensa back in the ring May 26th

Essensa joins Dekada lineup in Calgary

Norman Wiebe has registered as a nominee for the UCP in Red Deer South

Hospital and courthouse among pressing concerns to Wiebe

3 survivors after airliner with 110 aboard crashes in Cuba

It was Cuba’s worst aviation disaster in three decades and its third major air accident since 2010

Maskwacis and feds sign historic education agreement

The Maskwacis Education School Commission signed an agreement setting the stage for their education

Plane with 104 on board crashes on takeoff in Cuba

Boeing 737 operated by state airline Cubana crashed on takeoff from Jose Marti International Airport

UPDATED: Gunman opens fire in Texas high school, killing up to 10

Santa Fe High School which went on lockdown around 8 a.m. Friday

Coroner speaks about mix-up of Humboldt Broncos crash victims, release of name

A coroner involved says it wasn’t until an injured player woke up in hospital and said he was a different person that officials realized the mistake

‘Nowhere near close:’ U.S. rebuffs Trudeau hope for quick NAFTA deal

The United States declared the NAFTA countries were nowhere close to a deal in a statement Thursday

Prices at the pump spike as long weekend brings out Canadian drivers

Motorists in many parts of Canada are expected to see rising gasoline prices as they fire up their vehicles for road adventures on the Victoria Day long weekend.

Humboldt Broncos resolve trademark issue with junior hockey league

The Humboldt Broncos hockey club says they will have a team ready to hit the ice for the 2018-19 season.

Most Read