LORI MCLEOD AND TARA PERKINS
From Wednesday's Globe and Mail
January 21, 2009 at 7:51 AM EST
Consumers pinched by the credit crunch are getting some relief as lenders lower their rates on both fixed and variable mortgages.
Lenders including Royal Bank of Canada, Bank of Montreal, Bank of Nova Scotia, Toronto-Dominion Bank and CIBC are slicing mortgage rates shortly after the Bank of Canada cut its key lending rate to a historic low of 1 per cent.
The banks quickly followed suit, passing on the full central bank cut by lowering their prime rates half a percentage point to 3 per cent. Previously, the banks had failed to pass on the full benefit of rate cuts made by the central bank late last year to consumers.
Their quick move to follow the Bank of Canada yesterday could be a sign of pressure from the government and customers, and also that borrowing costs may be easing a bit.
"I think it's a combination of being pressured as well as the fact that despite the rate cuts, the prime/BA [banker's acceptance] spread has widened recently - this gives the banks the room to cut prime," said Genuity Capital Markets analyst Mario Mendonca.
It could also be a sign of heavy competition among lenders, said Edward Jones analyst Craig Fehr.
"My suspicion is that we'll see some of these special [discounted mortgage rate] programs come out across the board to varying degrees," he said.
Rates on variable mortgages, which move in tandem with prime, have been lowered by half a percentage point at many banks. This puts the rate on a five-year closed variable term at BMO, for example, at 4 per cent. Up until October, 2008, lenders had offered a discount off the prime rate, but that pricing model has changed and shows no sign of reversing, said Gary Siegle, Calgary-based manager at mortgage broker Invis.
"We used to see prime minus 0.6 [of a percentage point]. Now the best deal you can get is prime plus 0.6, and more likely prime plus 1," he said. Despite this change, mortgage rates are near historic lows, he added.
Lenders have cited an increase in their costs resulting from the credit crisis as the culprit behind the shift away from offering discounts off prime, to the current practice of charging a premium.
Many lenders also announced cuts to their fixed mortgage rates yesterday. RBC, for example, cut the posted rate on a five-year fixed mortgage by almost a full percentage point to 5.79 per cent. It is offering a special rate of 4.49 per cent.
Fixed rates have been expected to come down as bonds rally, sending yields lower. Late last year the spread between the five-year bond yield and five-year fixed mortgage rate soared past 500 basis points, more than double the normal level. Despite this latest reduction in fixed mortgage rates, the spread remains much wider than it was when the credit and housing markets were booming.
Now in "unprecedented economic territory," borrowers have to evaluate their personal situations carefully to decide what type of mortgage is right for them, Mr. Siegle said.
On a $300,000 mortgage, a five-year variable product would likely save the borrower about $1,200 a year compared with a fixed mortgage of the same term, he said. However, there's a risk the variable mortgage rate will, he noted.
Although the way mortgages are priced has changed, current rates are attractive, Mr. Siegle said. There's no cost for prospective home buyers to lock in at today's rates for a few months, allowing them to renegotiate if rates fall, he added.