Lenders including Royal Bank of Canada, Bank of Montreal, Bank of Nova Scotia, Toronto-Dominion Bank and CIBC are slicing mortgage rates after the Bank of Canada cut its key lending rate to a historic low of 1%.
The lenders are passing on the full central bank cut by lowering their prime rates half a percentage point to 3%. Previously, the banks had failed to pass on the full benefit of rate cuts made by the central bank late last year to consumers.
The move to follow the Bank of Canada came after calls from the government and customers. 'I think it's a combination of being pressured as well as the fact that despite the rate cuts, the prime/BA [banker's acceptance] spread has widened recently and this gives the banks the room to cut prime,' said Genuity Capital Markets analyst Mario Mendonca.
It could also be a sign of heavy competition among lenders. 'My suspicion is that we'll see some of these special discounted mortgage rate programmes come out across the board to varying degrees,' said Edward Jones, analyst at Craig Fehr.
Rates on variable mortgages, which move in tandem with prime, have been lowered by 0.5% at many banks.
Many lenders have also announced cuts to their fixed mortgage rates. RBC, for example, cut the posted rate on a five-year fixed mortgage by almost a full percentage point to 5.79%. It is offering a special rate of 4.49%.
Fixed rates have been expected to come down as bonds rally, sending yields lower. Late last year the spread between the five-year bond yield and five-year fixed mortgage rate soared past 500 basis points, more than double the normal level. Despite this latest reduction in fixed mortgage rates, the spread remains much wider than it was when the credit and housing markets were booming.
On a $300,000 mortgage, a five-year variable product would likely save the borrower about $1,200 a year compared with a fixed mortgage of the same term.