Last week the Bank of Canada lowered it’s overnight lending rate by -0.5%. Typically, Canadian financial institutions follow suit by matching the change in their prime lending rate. Instead, the Canadian banks lowered their prime lending rates by only 0.25%. The banks have essentially padded their own profits as a result. They are charging customers more for money that they are obtaining at a lower cost.
More interesting is what has been happening with the variable rate mortgage. Over the past few years this mortgage package has been one of the most popular options. Banks offered the flexible variable rate mortgage at a discount to the prime lending rate. Up to about a year ago, that discount was as much as -1.0%. Over the last year we saw that discount steadily shrink until it was recently down to about 0.3%.
Most banks quietly did away with any discount whatsoever (meaning customers would pay the prime rate with a variable rate mortgage) in the past week. Some financial institutions have actually done away with the variable rate mortgage altogether.
This is another indication of money becoming more difficult to come by. The already conservative Canadian banks are circling their wagons, refusing to take on risk and padding their profits wherever possible. Dropping the discounted variable rate mortgage is an indication that the banks feel that continued rate cuts are likely.
The silver lining here is that long term interest rates should also decline and thus the fixed rate mortgages should become cheaper for consumers. With house prices declining in Vancouver, and the cost of borrowing slipping as well, the investor and first-time buyer in Vancouver is in potentially a very profitable position. We just have less choice in the current marketplace when it comes to borrowing money.
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