Canada’s biggest lender, RBC reduced the discount on it’s variable rate mortgage product this week, despite there being no anticipated change to the prime rate in the near future. RBC cut it’s discount of prime by 0.20 percentage points, taking it’s advertised variable rate from 2.35% (prime – 0.65%) to 2.55% (prime – 0.45%).
RBC said in an official statement:
“Mortgage rates are tied to the banks funding costs which change from day to day. Due to global economic concerns, the funding costs for banks have been increasing. While we have held off in passing on these high costs to our clients, it is now necessary for us to increase this (variable) mortgage rate.”
The long and short of it is that lenders aren’t making enough money on this product due to the narrow spread between the rate the customers are getting on the variable and the lender’s costs to fund the mortgage. According to their statement, RBC has been suffering in silence to this point with the not making of the money on this product but they now have to increase their margins to pick up the slack. RBC’s variable product won’t be the only casualty this week as many other lenders will take advantage of the opportunity to shrink their discounts as well.
What does this mean to you if you have a variable mortgage or are considering one?
If you were at all interested in a variable rate product, you may want to give us a call immediately to lock in the current discounts on prime via a mortgage pre-approval, if they are still available at the time of your call. Prime is still subject to change even when you have a pre-approval in place, but your discount can be held for 90 to 120 days. It should be noted that prime is still expected to hold at 3.00% at least into the second quarter of 2012, if not longer – some are even saying until 2013, making the variable rate mortgage attractive for the right borrowers, even with the smaller discount.
If you already have a variable rate mortgage, your discount should stay intact, however, when the spreads are this thin, it’s not unheard of to get a call from your lender offering to move you into an attractive fixed rate. If you are still comfortable with your variable and the risks that come with it, stick with it and make extra payment to take the most advantage of it’s benefits over the next year.
If it’s been causing you a few sleepless nights and you were considering locking in anyway, it’s the perfect time to spank the bank and play hard ball when negotiating that fixed rate – it’s to their HUGE advantage to move you into a fixed product and make sure THEY know YOU know it!