Why Haven’t Mortgage Rates Kept Pace With Low Interest Rates?

Canadians who are looking to renew their mortgages are scratching their heads wondering why mortgage rates have not come down further.

In an attempt to stimulate the Canadian economy and to minimize economic damage from COVID-19, the Bank of Canada slashed its target overnight lending rate by 1.5% in March to bring it to 0.25%.

policy interest rate chart


Interest rates offered by financial institutions in variable accounts, like savings or high interest savings accounts, correspondingly dropped their rates in response to the Bank of Canada’s rate drop. 

However, mortgages did not. 


According to ratehub.ca, as of May 31, 2020, the discounted 5-year mortgage rate was 2.14%.  This is a 0.35% drop since January 1, 2020 (2.49%) and much less than the 1.5% drop in the Bank of Canada rate.

historical dicounter 5 year mortgage rates


Variable rates are generally tied to the bank’s prime rate which is currently 2.45%. The prime rate, also known as the prime lending rate, is the annual rate Canada’s major banks use to set interest rates for variable loans/lines of credit. A few months ago, it would not have been difficult to get a variable rate loan at prime – 1%. And while the prime rate has decreased this year (3.95% at Jan 1, 2020) in tandem with the Bank of Canada’s target overnight lending rate, this has not translated fully in variable mortgage rates because the banks are generally no longer offering the same discounts to prime. Today, an individual is much more likely to receive a discount to prime closer to 0.20.

The reason that this is happening is that the banks are maintaining higher margins as they expect larger losses. They are demanding a higher risk premium today given the economic uncertainty.

So what can you do if you are looking to renew your mortgage or purchase a new home? Not all banks treat every client equally. Depending on their current loan book and their willingness to take risk, each bank assesses mortgage risk differently. When working with our clients, we suggest that they speak to a number of different banks and mortgage brokers to make sure that they have the opportunity to get the best deal that is available to them. Regardless of the fact that rates have not come down as much as might have been expected, there are still historically low rates available today.

At Tall Oak Private Wealth, we pride ourselves on having great relationships with bankers and mortgage brokers to support our clients. Whether you are looking to take on a new mortgage or are renewing, we will work with you to assess your ability to afford the debt and the impact the new rates can have on your cash flow. We also work with many clients and financial institutions to ensure the most competitive rates are being offered.

Please contact us if you are weighing your options – we are here to help and look forward to the conversation.

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