The outlook for variable rate mortgages is flat. Steady as she goes for at least the remainder of 2012 and likely well into 2013. This is great news for borrowers, bad news for investors and confusing news for legislators and lenders. So who controls variable mortgage rates in Canada? This is a great question and the answer is more convoluted than you might think. First, we must understand that variable mortgage rates are controlled by different centers of influence than fixed mortgage rates.
The Prime Rate
The prime rate is an extremely important factor for those of us who already have a variable rate mortgage. Our mortgage will change in direct step with changes in the prime lending rate. Variable rate mortgages are directly controlled by Mark Carney and the bank of Canada (BOC). The BOC has direct control over the overnight lending rate which is the rate at which major financial institutions borrow and lend for one-day (or “overnight”). This rate in turn drives the prime rate of interest that Canadian mortgage lenders charge to borrowers. The Bank of Canada has many competing priorities in its mandate. The bank must balance monetary policy, our currency, the financial system and Canada’s fund management. In today’s economic environment the BOC is feeling pressure to raise rates to limit indebtedness and to keep inflation in check. Simultaneously, the bank is feeling pressure to lower or maintain rates in order to maintain our currency objectives and stimulate growth.
Currently the biggest influencer on the Bank of Canada is monetary policy. US legislators have made a bold statement by declaring that they will not raise the US overnight rate until sometime in 2013. This has largely tied the hands of Mark Carney and the BOC from increasing the Canadian overnight rate. As a result, foregoing any unforeseen developments you can expect Canadian variable mortgage rates to remain steady through to sometime in 2013.
Discounts to Prime
For those of us considering a new variable rate mortgage you’d be discouraged to discover that lenders have all but eliminated any discounts. 12 months ago you could have found 5 year variable rate mortgages with an 80 basis point discount from prime. Today, it’s not uncommon to see variable rates with a 10 basis point premium. Changes to the discounts are a reflection of increased lending costs being passed on to consumers. These increased costs or tighter spreads are a result of greater uncertainty and increased regulation resulting from a global banking crisis. This discount or the current lack thereof makes today’s variable rate mortgage much less attractive when compared to the security offered by similarly priced fixed rate mortgages.
The bottom line is that if you have a variable rate mortgage with a decent discount then you are in a good position to ride out this steady rate environment. If you are shopping the market for a new mortgage, however, you should seriously consider going with a fixed rate.