• It’s official, as of today all the big Canadian banks have now lowered their prime rate. RBC was the first to announce they would drop their prime rate by .15% to 2.85%. BMO, TD and CIBC quickly followed with drops of their own, then the ScotiaBank and National Bank fell off the fence and landed at 2.85% as well. This is good news.

    If you are a current variable rate mortgage holder, you are now paying less interest on your mortgage. Congratulations.

    However, this is really only a half measure. The Bank of Canada dropped their overnight rate by .25% whereas the banks only lowered prime by .15%.

    “We believe our announcement is a balanced approach which reflects our actual cost of funds and helps clients save money on products such as variable rate mortgages, lines of credit and floating rate loans,” RBC said in a statement. Hmmm…

    3 Sides of the Coin

    What to do, what to do? As all the pundits looked in, it appeared the banks really only had 2 choices, flip a coin, would they stay put or lower rates? However it would appear the banks found the middle ground and added a third side to the coin.

    Side One. Don’t Move.

    By lowering the overnight rate, the Bank of Canada reduced the costs of doing business for the banks. Had banks kept prime rate at 3%, they would have reaped all the benefits of the drop that was intended to stimulate the economy. The only stimulus would have been to bank’s shareholders.

    The problem with not making a move would be the public outcry and the countless media stories about corporate greed and corruption that would no doubt follow. And rightfully so.

    Side Two. Drop by .25%.

    Usually when the overnight rate changes, all the banks follow suit in full measure without delay. Up or down. However as this is the first time in just over 4 years that the overnight rate moved, it wasn’t a quick and easy decision.

    A full drop of .25% would have been consistent with past drops and most preferable in the public’s eye, but in the boardroom of every bank it would be a different story. Obviously banks want profitability, by simply passing on the rate drop to Canadians, from the bank’s perspective, it would be a missed opportunity to increase their bottom line.

    Side Three. Take A Half Measure.

    While not dropping prime rate elicits cries of corporate greed, and while dropping it by .25% is seen as a missed opportunity by bankers united… taking a half measure and dropping prime by .15% is actually quite brilliant.

    Well played RBC, well played. For this you deserve a slow clap. Variable rate mortgage holders get their interest relief as prime goes down, and the banks get a little more profitability in the mean time. It was such a good idea that all the banks followed suit.

     

    There may be a few groans about how the change should have been bigger going forward, but most likely this whole thing will become back page news in the next couple of days and all will be forgotten.

    Now as broker channel lenders base their variable rate mortgages off the bank’s prime rate… regardless where your mortgage is at, if you are a current variable rate mortgage holder, you can expect to see a letter in the mail soon outlining the changes to your mortgage. If you want to talk it through with me, I am always available.

    Let me leave you with this…

    The real test will be what happens when the Bank of Canada increases the overnight rate? Will the banks take a half measure when increasing their rates? Probably not.