With the next Bank of Canada decision approaching, some borrowers question whether to wait for a potential drop in the prime rate before evaluating their mortgage renewal options.  Similarly, those buying properties might also contemplate if they should delay their decision on which rate type to select.  While thinking that a lower prime rate will automatically lead to better mortgage offers may seem intuitive, the reality is more complex.

The Key to Variable Rate Pricing: The Variable Rate Discount

Variable rate mortgage rates are comprised of two main factors: the prime rate, and the discount the lender offers off that rate.  The variable rate discount is the pricing component that determines how much less you’ll pay compared to the prime rate.

If a lender offers a 5-year variable mortgage with a discount of -0.70% off the prime rate (currently 6.7%), the effective rate would be 6.0%.  This discount remains constant throughout the 5-year term of the mortgage, so the rate will always “float” at 0.70% below whatever the prime rate is.

Lenders Can Change Variable Discount Offers At Any Time

If a given lender has too many fixed-rate mortgages on their books they may deepen variable discounts to attract more borrowers to take variable rates, and vice versa.  And in stable markets, banks may offer deeper discounts as well.

Fixed Rates and the Variable Rate Discount: Independent of Prime Movements

Both fixed rates and variable rate discounts are influenced by lenders’ cost of funds, credit risk, competition, housing and financial markets, and broader economic conditions.  Just as the variable rate discount is not directly tied to prime rate movements, neither are fixed mortgage rates.  Though both may trend in the same direction as the prime rate over time, a variety of factors are at play, which may or may not coincide with changes in the prime rate.

Bottom Line

Bank of Canada rate decisions do influence fixed and variable rate pricing, but not typically in a synchronized way. Rather than trying to time decision-making with Bank of Canada announcements, there’s likely more value in making rate decisions by evaluating current options and forecasted trends as they align with your financial goals.  Please reach out at any time should you wish to discuss your mortgage, I am always happy to help.

Image Credit: Raffaele Parente Unsplash