Why is Prime Going Down - But Not Fixed Rates?

One of the most common questions we’ve been hearing from folks lately is “Didn’t the Bank of Canada just reduce interest rates half a percent?”  Of course, the answer to that question is yes.  The second question we get is “why haven’t fixed rates gone down too?”.  The answer to that is more complicated.

You see, there is (or always has been, anyway) a direct relationship between Bank Prime rates and the Bank of Canada’s overnight rate.  If the Bank of Canada decreases or increases rates, the major banks usually follow suit.  That’s still the case, for now.  There is, however, a much looser correlation between fixed-rate mortgages and the Bank of Canada’s rate.  Fixed-rate mortgages are more closely linked to bonds and will go up and down based on yields and the spread that lenders want to earn over and above that.

This article at the Globe and Mail (link might expire after awhile) does a good job of explaining the market pressures that are de-coupling fixed rates from what happens at the Bank of Canada…and why a decrease in the B of C rate might in fact lead to HIGHER fixed rates. 

None of us want that, of course, but it is probably the end result of too many poor lending decisions by major lenders in the US, and to a lesser degree, here in Canada.  The lesson here is this:  If you lend money to people who can’t pay it back, and you do it often enough, the consequences are substantial. 

Unfortunately the good taxpayers and the people who pay their bills end up paying for those who don’t.