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Could the Bank of Canada Lower Rates Again?

March 10, 2015

After a surprising decision from the Bank of Canada in January 2015 to lower their overnight lending rate by 0.25%…

Canada’s largest banks were expected to follow suit by lowering the rates on their variable rate mortgages by an equal amount of 0.25%.

Canada’s banks decided to pass on a 0.15% cut to their customers while holding onto the extra 0.10% difference, lowering the prime rate from 3.00% to 2.85%. While there was some public backlash, the banks largely pointed to one factor in order to justify their decision not to completely match the Bank of Canada’s rate cut – the protection of profits.

Speculation is abound that the Bank of Canada may once again lower their overnight lending rate before the end of the 2015 calendar year. If that were to be the case, Canada’s largest banks would certainly face a great deal of pressure to match, point for point, any decrease in the Bank of Canada’s overnight lending rate.

There is however, a caveat.

While the Bank of Canada could conceivably lower their overnight lending rate and banks could follow by lowering their ‘prime rates’ to 2.60% from today’s 2.85%, which would be fantastic news for those who currently hold a variable rate mortgage today.

Those who are coming up for renewal, or are in the market for a new home, might not be so fortunate however. Any further decrease in the prime rate would likely mean a lesser discount off of the prime rate as well.

As you may already know, variable rate mortgages are set on some discount or premium to the banks’ prime rate. Today, that discount is typically around 0.60%. So, consumers looking for a mortgage will typically see “…prime minus 0.60%.” on the documents to their variable rate mortgage.

Today prime rates from Canada’s largest lending institutions sit at 2.85% – so a discount of 0.60% off of the prime rate is effectively 2.25%. The discount offered to customers is entirely at the bank’s discretion.

So what if prime rates dropped again? Perhaps to 2.60%? If such a rate decrease were to be implemented, consumers looking to renew their mortgage would likely start to see discounts off of prime closer to 0.30% offered to them instead. Effectively bringing the interest rate on the variable rate mortgages offered by the bank to 2.30%.

Of course, if asked by inquiring minds, there is always one defense Canada’s largest banks can always point to – the protection of profit.

Admittedly, this is entirely speculation at this point in time. There is a way for consumers to protect themselves however; as Canadians do have the ability to lock in ‘rate holds’, completely free of charge, from mortgage lenders up to 120 days in advance. If you are currently a home-owner with a mortgage coming up for renewal before the end of 2015, or if you’re looking to purchase a new home some time this year – you would be well served to secure a rate hold now before any decisions are handed down regarding interest rates in Canada.