Is everyone asking the same question? I’ve been here in Victoria coming on 20 years now. I’m from Calgary, where, other than the freak snowfall that lasts for a day in August (specifically in 1994 from what I remember), or the 3 day Chinook which brought summer weather in February, the weather was “somewhat” consistent. Summer was hot and sunny, winter was snowy and sunny too. I’m definitely an outlier here, but I do miss the Calgary winters with the snow and the sun.
This summer hasn’t felt like summer much at all. It’s felt like…..Victoria. Rainy, overcast, and just sort of “in the middle”. But hey, I can’t complain. The flowers bloomed and the grass is green, and it was all generally uneventful. There was one night of thunder and lightning which was pretty cool, and another night of Aurora Borealis which was a treat too if you were up late.
It’s definitely been a better summer for economists who were betting on lower inflation, and mortgagors who have been hoping for lower interest rates. The BoC cut the overnight rate twice, bringing it from it’s high at 5%, down to the current 4.5%. It’s no secret that everyone is expecting another rate cut next week, on Wednesday September 4th. With inflation now well in check (mostly), unemployment up (only very slightly), consumer spending down (again, slightly), the economy is now experiencing the soft landing that the feds were hoping for. We aren’t in a full blown recession. Demand is still strong, unemployment isn’t up by a lot, foreclosures haven’t increased dramatically. The sky ISN’T falling.
Some are calling for the rate to drop 0.5%. Even if we don’t see that drop, we can expect the BoC to keep dropping rates consistently now for the foreseeable future. Bank prime basically tripled on it’s way up, indicating that there’s lots of room now for the rate to come down.
I’m doing my prime rate expectations first because it flows into those hidden moves that you’re here to read about.
So where are we headed? The BoC’s neutral overnight rate lies between 2.00% to 3.00%. That’s where they say the economy and inflation should lie in balance. That would bring our prime rate in at 4.20% to 5.20% from the current 6.70%. How long will it take for the BoC to get us there? Well, we have another 1.50% to a probable maximum of 2.50% in rate drops to expect, so, it will take well into 2025 and early 2026 to reach the lows. Remember, these cycles last for a while, and I’m talking years. The BoC will be constantly reacting to what inflation and our economy are doing. If we’re performing surprisingly well and inflation starts to be a threat again, you can expect the BoC will stop or pause rate cuts. Remember, nothing happens in a straight line.
Are we going to see prime rate at 2.45% again? Unlikely, unless the sky does fall, as it did in March 2020 with the pandemic. There’s going to be another article in the coming months talking about my long term expectations for rates (we’re talking the next 20 to 30 years).
Let’s delve into what you’re all here for. That sneaky hidden move when rates are going down. There’s actually 2 parts to this.
Let’s state one obvious point, a bit of foreshadowing, one could say. The big banks basically run things. When they see an opportunity to increase profits, they take it, and without much opposition. And even though they’re separate entities, the banks move in unison when there’s an opportunity to take money out of your bank account. Not surprised? Neither am I.
Let’s see if you can spot the hidden trend yourself. Take a look at this prime rate history chart and see if you can spot where things just don’t seem quite right.
Bank Prime Since The Year 2000
Notice anything funny in the numbers? Let me give you a clue. The BoC makes their moves in 0.25% increments, or multiples of that (0.5%, 0.75%, 1.00%). Can you spot the outliers, now? Some of us can see it, and still, some of us cant (That is EXACTLY what the big banks are hoping for, that their sneaky moves to go somewhat unnoticed, to not cause a bad publicity event).
For those that don’t feel like playing Where’s Waldo, check out the rate drops in February 2015 and then again in July 2015. Bank prime only went down by 0.15%, instead of the 0.25% that the BoC dropped.
Whilst the BoC dropped the overnight rate by 0.25%, the banks unilaterally dropped Bank prime (what your variable lending is based off of), by only 0.15%. They made a move to increase their margins by lowering their lending rate less than what the BoC dropped by. It’s interest rate manipulation at it’s finest. Think of the middleman for any product unilaterally making something more expensive. It happens, a lot. This one move though, had a massive effect, and in my opinion unnecessary (see numbers section below).
So, while your lending rate was supposed to go down by 0.50% in that time-span, your lending rate actually only went down by 0.30% (and the bank forever increased their lending margins). This is also why our prime rate isn’t a multiple of 0.25%. The prime rate SHOULD have been 2.25% at it’s low, and 7.00% at it’s high. Not 2.45% at the low or 7.20% at the high.
Is un-fun a word? No? Maybe it should be when we’re talking about bank profits.
0.20% per year on $100,000 is $200 a year. (.2 of 1% is 20 basis points, 1% is 100 basis points)
0.20% per year on $500,000 is $1000 a year.
In 5 years, that’s $5000.00 the bank conveniently grabbed from you due to this maneuver, if you have a mortgage of $500,000 (and most of us do).
Now to really get nuts with the numbers. If there’s roughly $400,000,000,000 (yep, 400 billion) in outstanding variable mortgage debt, that’s a whopping $800,000,000 (800 million) in extra interest that Canadians pay, each year, to the banks, because of this 0.10% move, 2 times, in 2015.
Wonder how I got to these figures?
Total mortgage debt in Canada is currently around 2.16 Trillion dollars, according to some recent articles I found: CMHC Press Release from 2023 and This CTV article from May 2024
Various articles I found show that variable borrowing is around 20% to 25% of total residential borrowings, here’s one: CMHC Survey page 14
If these numbers are off, sue me (don’t). I didn’t put a massive amount of effort or research into these numbers. I’m just demonstrating the sheer size of the totals we’re talking about.
9 years later and the rates are dropping again. I sincerely hope we don’t see this kind of market manipulation again, but I don’t put anything past these banks. It’s been almost 10 years since they last pulled this stunt. They know we Canadian’s have short memories and probably don’t remember that this even happened. So my guess is that we could probably see the banks do it again. Squeeze us for a little more? Sure. Hey, the banks can even get prime rate back to the easier multiples of 0.25% too. Chances? Bet on it.
Wait! What if the banks could ACTUALLY be our friends like they claim in all their marketing, and do the opposite, that is, course correct and go back to the lower prime rate? Simply put: Don’t bet on it.
Or, maybe they just hold steady and don’t manipulate rates as they come down? Sure, there’s always the chance of the “middle thing” happening.
I do think we’re all a bit smarter now and tend to make a bigger stink when there’s an injustice being done, and yes, our government is holding corporations more accountable now for this exact sort of stunt. In reality though, if the banks do it again, there’s nothing we can do about it. We will move along, just like we did back in 2015.
Now, part 2 isn’t as blatant as part 1, but still, it’s an even more effective method for the banks to get you to pay more money in interest. Also, it happens more often than the first, and we can’t really pinpoint it’s timing.
It’s that as rates are decreasing, the spread, or discount, that the banks offer, shrinks. Simple as that.
While fixed and variable rates were at their height, we were seeing variable offerings at P-1.20% on high ratio business, and even P-1.00% on uninsured conventional business. (The SPREAD, or DISCOUNT on prime is the -1.20% or -1.00%).
As rates are decreasing, those who are getting new variable mortgages now aren’t going to experience the same lower spreads as a few months ago. The best offerings on variable rates are around P-0.95% on high ratio business, and maybe P-0.75% on uninsured conventional business.
Back in 2022, when rates were low and on the cusp of increasing, we saw the variable discount at -0.30% or thereabouts. The BoC rate was very low, and the banks seized the opportunity to increase profits by decreasing their variable rate discounts.
This is why, back in June, in another one of my articles, I was practically BEGGING people to apply for a rate special I had on at that time. It was P-1.00% on conventional business, and I knew it was good. Now the proof is in the pudding. We aren’t seeing that spread now. I really do hate to say I told you so, because I always want my clients to pay the least interest possible.
For those that did get that crazy low spread, congrats. For those of you that didn’t? Well, take it as a learning opportunity, and watch for these trends in future cycles. And, listen to those who know! Me! (gotta get that plug in somewhere).
I do like the variable rate right now because I think fixed rates are going to keep dropping, and I’m advising most of my clients to “lock in” when fixed rates are hovering around 3.00%. They could drop more than that, but it’s somewhat unlikely. Until then, variable rate holders will experience rate drops as BoC cuts the rate. Yes, you start out at a higher rate, but the potential savings in a future lower fixed term outweighs the extra interest you pay upfront by, some.
Final note on the variable rate mortgage, and sorry if I’m a broken record here. Not everyone will qualify on a variable rate. The qualifying rate is higher. So if your debt servicing ratios are already high at the lower fixed rate qualifying figure, you just won’t qualify for the variable rate. It’s not quite right in my opinion, but it’s the rules. You get what you get, and you don’t get upset. Do I sound like a parent?
If you’re just about to get your mortgage now, don’t be too sad. You’re probably getting an awesome deal on a property. You’re still in a buyers market. You didn’t have to compete against 15 other offers or go unconditional, and yes, you’re getting a much lower rate than those who locked in a year ago. Fixed rates are way lower and variable rates are coming down. It’s still good news.
Like I always say – your property decisions outweigh mortgage decisions, for the most part. If you’re an owner, be happy, and keep going. If you’re buying now or soon, make sure you’re placing the purchase in the hands of experienced professionals. Be aggressive on offers when you can be, and try to get as good of a deal as possible.
If you are renewing or refinancing, just call me. It’s really that simple. I’ll tell you to stay with your bank or I’ll suggest you move the mortgage if I can create value in the transaction.
If you or anyone you know want this type of deep analysis and insight on your mortgage or your property purchase, just give me a ring. 250-858-7160, or email me, david@olympicmortgages.ca. I’ve been at this gig a really long time now, and I know how to save you or your friends and family the most money.
I have so much more to talk about, but this was a lot. So expect another email in much less time now, probably in a week or so, after the BoC has made it’s rate cut. There will be more analysis and insight sooner than the next rainfall, hopefully.
Signing off for now,
David Steinberg, AMP, BComm
Mortgage Psychologist and Property Strategist
(and Lead Broker and Owner at Olympic Mortgage)
250-858-7160
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