TD Bank increased it’s posted rates and RBC will be doing so today.
This increase, from 5.14% to 5.59% at TD, is the “biggest move in years.”
The first reason for a lender to increase their rates would be when the bond yields increase. We have seen a slight increase but not that much, and definitely not enough to increase the discounted rates too. Generally, when the bond market changes, the discounted rates will change.
Discounted rates are the rates that clients actually see on their mortgage commitments.
But actual discounted interest rates have not changed… so what exactly is happening?
Banks benefit from higher Posted Rates, and here is why:
#1. Posted rates are being used to calculate the bank’s mortgage penalty.
Banks use the posted rate for their penalty calculations. The higher the posted rate, the higher someone’s potential penalty is when they break their mortgage prior to the end of the term. I’m referring to the Interest Rate Differential ( IRD) for the fixed rate mortgages. Needless to say, this is definitely not in the clients’ best interests.
If you are in a variable rate mortgage or with a mainline lender, this does not concern you since the payout calculations are very different (and lower).
As you know, variable rate mortgages, lines of credit and/or student loans are all based on the Prime Rate. Many of you might be asking should I lock in my variable rate mortgage?This is not an easy question to answer. Why? Because, just like when purchasing a property, everyone’s own personal situation is different.
Here are 3 main points to consider before you jump to action:
1. Your current variable interest rate
2. Your future goals and housing/mortgage plans, and
3. Your potential new fixed rate
Let’s explore these in more detail...
Last Wednesday the Bank of Canada announced an increase in their overnight lending rate by .25% taking it from .50% to .75%. This is the first increase in the past 7 years. The rationale here was that economic growth projections are higher than previous ones and this was a way to temper inflation.
The banks were quick to jump on the bandwagon and have increased their prime lending rates by the same amount – to 2.95% from 2.70%. It is interesting to note that while increases seem to flow through to the banks instantly, the two last previous changes to the Bank of Canada rate (reductions of .25% each time) were met with not only a delay in the banks reacting, but also a smaller reduction in prime (they reduced prime by .15% each time). This phenomenon is good for shareholders and executive bonuses but not so good for borrowers.
Since the Bank of Canada dropped the overnight rate to 1/2 a percent on July 15th 2015, I have been receiving quite a few phone calls and emails from clients curious to know what this means to them.
So let start by defining what an overnight rate is: The Bank of Canada sets what is called the “overnight rate” which has more to do with how banks borrow money among themselves than it does have a direct impact on consumers. To make is short and simple: The prime rate is not the overnight rate.
The change to the overnight rate has no direct impact to mortgage rates. According to the Bank of Canada: “Changes in the target for the overnight rate influence other interest rates, such as those for consumer loans and mortgages.” In other words the overnight rate can influence the prime lending rate, but it doesn’t have to, and ultimately the banks are in charge of making that decision.
A drop in the overnight rate does not mean banks will pass this savings to us.
Although for the past several years the Banks have followed the prime rate drop, they didn’t do so on January 21st 2015, when the overnight rate fell by .25% while the banks only dropped by .15%. As we expected, the next time the overnight rate dropped in mid July, the same thing happened, overnight dropped by .25% while the banks lowered by only .15%....
On January 21st the Bank of Canada (BoC) made a surprise announcement cutting the overnight lending rate by ¼% from 1% to 0.75%. This is the first change in over 4 years and dispels all the rumours and predictions that rates would soon begin to rise. At the time of writing, the major banks have not followed this decrease by lowering their prime lending rate which currently remains at 3%. As each bank controls their individual prime rate, this BoC rate cut currently will not affect consumer lending rates for everything from car loans and lines of credit, to variable rate mortgages.
Hopefully the banks will make a change before too long as the whole point of the Bank of Canada lowering rates is to help stimulate the economy, so if consumer borrowing costs don’t come down, the move may not have the desired results....
Please Feel Free to Leave a Comment on my Blog Post!