Lenders have been making changes to their mortgage rates lately and many in the industry are curious as to what is going on. While the Bank of Canada has lowered its overnight rate the banks have not passed along the full reduction to consumers. (The overnight rate is generally the rate that large banks use to borrow and lend from one another on the overnight market.)
The Bank of Canada reduced its rate by three-quarters of a percentage point back in December 2008, however the banks responded with only a 50 basis points reduction. Then after a series of increasing rate discounting on variable rates over the past year, we saw the first sign of tightening again back in April. The underlying cost of funds has not materially changed this year.
There seems to be a general consensus that, at these discounted levels, banks have not been making high profits on variable products. Canadian lenders are likely pricing in the increased risk and the offsetting cost of managing that increased risk.
It is not surprising that lenders are looking at ways of maximizing their profitability while managing their risk. With lines of credit and credit card growth stagnating in recent months, mortgages, which have grown approximately 7.4% on a year-over-year basis, have been one of the saving graces for the banks.