TORONTO – Mortgage-seeking Canadians caught a bit of a break on July 15, as the Bank of Canada announced it was lowering its overnight rate target by ¼ of a percentage point, to 0.5 per cent.
The first of Canada’s major banks to follow suit was TD, who initially reduced their prime rate to 2.75 per cent, trimming off 10 basis points in the process. Later on Wednesday, however, Royal Bank of Canada and Bank of Montreal announced that they were each reducing their own prime lending rates by 15 basis points to 2.70 per cent – ultimately prompting TD to fall in line with an additional 5-point drop.
For the second time this year, the major lenders’ prime rate adjustments only partially reflect the Bank of Canada move that spurred them.
“This marks the second time this year that Bay Street has taken a more cautious approach to their lending rates after the central bank has slashed its benchmark,” the Globe and Mail’s David Berman reports. “Banks have lowered their prime rates by a total of 0.3 percentage points this year, or nearly half the Bank of Canada’s total reduction of 0.50 points over the same period.”
To get a better idea of the adjustment’s ramifications for borrowers and homeowners, we caught up with GTA Real Estate News’ home financing correspondent Shubha Dasgupta, a GTA-based mortgage broker with Dominion Lending Centres.
Why are the banks’ prime adjustments only partially reflective of the Bank of Canada’s overnight rate cut?
DASGUPTA: Some people and economists will argue that the reason for not passing the full 25 basis point rate cut on to the consumer is to build in future loss provisions, due to high levels of consumer debt. However, I believe the answer may be simpler: it’s a way for the major banks to increase their profits in the short term.
This isn’t the first time this year that the Bank of Canada has lowered the overnight rate. Might further adjustments be in store for the near future?
DASGUPTA: With the overnight lending rate sitting at a mere 0.50 per cent, currently there isn’t much room left for further cuts. It’s certainly not out of the question, though, if the Bank of Canada decides that the Canadian economy is struggling through our current recession. The recent rate cuts have been more of a measure to increase export by lowering our dollar, than they have been to spur consumer spending through lower rates.
When prime interest rates are adjusted downwards, does it precipitate an increase in the number of Canadians seeking mortgages?
DASGUPTA: Due to where interest rates have been for the past five years or so, most consumers have become accustomed to low rates. Once the vanity of this wears off, so does the urgency of rushing out in search of more credit.
Low credit has now become the norm and consumers understand this. I haven’t seen recent rate drops influencing consumers to apply for more credit, as the pressure is no longer there – they know rates are staying low and there’s no rush.
Anything else home buyers should know in light of this latest change?
DASGUPTA: The final point I’d like to make is that the majority of Canadian borrowers prefer the security of a fixed rate mortgage. The extent of this preference has been increased due to the more stringent and restrictive lending practices of the banks, which have made qualifying for a variable rate mortgage more difficult.
Also, even with the recent rate cuts of 0.15 per cent and 0.10 per cent, the banks have adjusted the discount they offer consumers. A few months ago, you could get a variable rate mortgage at Prime less 0.80 per cent – whereas now, you may only be getting a discount of Prime less 0.60 per cent. So they have offset the costs again quietly, with most consumers unaware.
For more information about acquiring a mortgage, or the types of mortgages available to Canadians, we invite our readers to get in touch with Mr. Dasgupta directly via his web site at http://torontosbestmortgage.com/contact-dominion.