How the Overnight Lending Rate Affects Your Northern BC Mortgage

It’s been a big week for interest rates in Canada, so here’s a quick post to get you up to speed:

The Bank of Canada dropped its overnight lending rate by a quarter of a percent last Wednesday, to 0.75% (see this article on CBC.ca). In short, this is the interest rate the major financial institutions use to borrow or lend money between themselves for a day, which means it has a direct effect on the loans those banks offer in turn (such as mortgages). This “key policy rate,” as it’s also known, is traditionally matched by the banks in their own interest rate policies (hence the name).

So, for example, if the major banks’ prime lending rate was at 3.00% (which it was as of last Wednesday, and has been since September 2010), consumers should reasonably expect banks to drop to a prime rate of 2.75% as a result of the overnight rate cut of 0.25%.

But that hasn’t happened. The banks have opted to protect their own profits at the expense of Canadians, and the implicit recommendation of the Canadian government. Only yesterday did one of the major banks, RBC, lower their prime rate – but only to 2.85%. The other banks have since followed that lead, though begrudgingly – TD initially announced last week that it wasn’t going to be cutting rates at all.

The fact that the banks’ prime rate cut doesn’t match the overnight lending rate sends a clear message, as does the fact that this is the lowest prime rate cut on record since 1935: the banks are more interested in their own profits than Canadians and Canadian consumers. As Robert McLister puts it via The Globe and Mail, “Bottom line, banks saw this as an opportunity to retain profit in the face of margin pressures…” Or, as David McVay explains: the banks have “reduced their mortgage rates and reduced the prime rate, not as much as the bank rate has gone down, but as much as they consider prudent given the profit pressures they’re under right now.”

If you don’t want your mortgage rate to be “as much as the banks consider prudent,” give me a call at (250) 782-9665. I can get you a rate that you consider prudent.

Lori Lalonde, Your Northern BC Mortgage Broker

(For a more detailed description of the overnight lending rate, check out the Bank of Canada website).

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