The Bank of Canada dropped its’ overnight rate twice in the last few weeks for a total cut of 1.00%. The banks and other lenders in Canada previously held their Prime Rate at 3.95% and followed suit accordingly dropping their Prime Rate to 2.95%. If you had an existing variable rate mortgage then you were in luck as your rate dropped instantly. However, for borrowers who want to get a new variable rate mortgage none of these savings will be passed along to you. Here’s why.

Prior to the Prime Rate drop we were seeing banks and lenders offering new variable rate mortgages at rates as low as Prime – 1.00%. So when the Prime rate was 3.95% you could get a variable rate at 2.95%. Now that the Prime Rate has dropped to 2.95% you would expect that you could get a variable rate mortgage as low as 1.95% given there was a 1.00% discount prior to the Prime Rate drop. However this is not the case.

Lenders have dropped the Prime Rate down to 2.95% which is good optics for them to show they are helping out consumers. However, now that the Prime rate has lowered, lenders have gotten rid of their discount. A typical variable rate mortgage right now is priced at Prime + 0%. Even though the Prime Rate dropped, the effective variable rate you are paying is the same. Essentially the banks are pocketing the 1.00% rate drop while leaving consumers paying the same rates!!

Several years ago they implemented a similar tactic when the Bank of Canada made two cuts to its’ rate and the Banks only passed along a portion of these two cuts when they decreased their Prime Rates. Again, they failed to pass part of those rate drops on to consumers as well.

In addition to this news, fixed rate mortgages have increased 3 times in the last few weeks coming up over ½%. At a time when there is great economic turbulence the cost of borrowing seems to be increasing a fair bit in the short term.

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