By Mark Kerzner
President TMG The Mortgage Group

It seems as though we have come out of the gates of 2015 with a bang!

Just when we thought we turned the subject of front page news over to the OIL industry, it seems to have come back full circle to mortgages and interest rates.

As a nation, we have never seen bond yields and the overnight rate at these low levels. And the cost of funds inherent in those two areas have resulted in historical low rates for both variable and fixed mortgages. In addition, it is very rare when the yields on the 5-year bonds, and the return that regular investors earn on government guarantees, is actually lower than the overnight rate. That’s the case at the time of this writing (bond yields at 0.64% and the overnight rate at 0.75%). This usually implies some rough economic times ahead. 

What is remarkable though, is that with the latest 0.25% reduction in the Bank of Canada overnight rate the banks chose to lower their PRIME rate(s) by only 0.15% thereby 'banking' the difference as enhanced margins
To put that move in context; never before have banks moved their PRIME rates by less than 0.25%. At the same me time the banks lowered the interest rates they pay on savings and investment accounts by the same 0.25% that the Bank of Canada lowered its overnight rate.

The banks have collectively said their margins are under pressure and this was an opportunity to alleviate that. On the one hand, it’s interesting to me to see the banks continue to erode their own margins by heavily discounting rates when their margins are eroding. On the other hand, when they lower the PRIME rates they are lowering the rates on a portfolio basis as opposed to when they decrease discounting on an ARM, which is reflected in only subsequent new deals put on the books.

That said, I simply cannot imagine a day when the Bank of Canada has to increase its overnight rate and the banks 'collectively' say, "My margins are large enough so I am just going to keep the PRIME rate lower and not raise it (by the full amount)."

I find the argument that the banks are mitigating a potential housing bubble and protecting the Canadian consumer from overextending very difficult to accept.  If that were the case they could simply set limits on rate buy-downs and discretionary pricing.

There is a silver lining for us as brokers in all of this news. Can you imagine the conversation a first time homebuyer would have going into a branch to discuss the impact of the news of the day on their buying decision? Now picture the same conversations taking place with an educated, professional, full time mortgage broker. As uncertainty abounds, it is absolutely vital that mortgage consumers seek out the expertise of a broker to navigate their mortgage financing needs.