Are banks being picky in following rate changes?

Canada’s major banks are passing on the full weight of the 0.25% rate hike from the Bank of Canada (BoC) to consumers — even though they didn’t give clients the full savings from past rate cuts.

The move has Vince Gaetano, a principal at mortgage broker monstermortgage.ca, wondering whether the big banks are intentionally gouging consumers, according to the Financial Post.

“There is always a focus on profits and getting more money out of the pockets of Canadians,” Gaetano told the publication. “The last Bank of Canada decrease of 0.25% only garnered a benefit of 0.15% to Canadian borrowers. This happened [during] the last two rate decreases.”

Royal Bank of Canada (RBC) was first to increase its rates, announcing a rise in prime lending rates from 2.7% to 2.95% effective July 13. In the same day, the other major banks followed suit with similar increases.

“The Bank of Canada rate is one reference point that we use to set our prime rate and is not the sole driver of the bank’s funding costs,” RBC told the Post in an email. “In a persistently low rate environment, funding costs have steadily increased over the past few years.”

While the prime lending rate at most banks traditionally tracks the BoC’s overnight lending, it hasn’t always done so. In 2015, the major banks did not fully match two rate cuts from the central bank, resulting in a 0.2% spread that hasn’t been recovered since.

In 2008, during the time of the late Jim Flaherty as finance minister, the central bank cut its prime lending rate by 50 basis points; the banks cut theirs by just 25, but agreed to further cuts after Ottawa declared it would provide more liquidity in the mortgage sector.

“As Minister of Finance, I do not comment on the Bank’s independent decision,” Liberal Finance Minister Bill Morneau said in an email to the Post.

The 25-point increase by the banks results in an increase of $50 in monthly interest costs on a $400,000 mortgage with a 25-year amortization, according to James Laird, co-founder of ratehub.ca.

“I don’t know if I know the truth,” Laird said when asked whether funding costs at banks actually justify them passing on the full increase. “Was I surprised when some of the savings were not entirely passed along (in 2015)? I wasn’t. … They focus on their bottom line and best move for bottom line is for them all to move up in unison by 25 basis points.”

Around a year ago, when other banks were paying 2.7%, Toronto-Dominion Bank (TD Bank) moved prime to 2.85% for variable rates and home equity lines of credit. In response to the recent hike, it moved its mortgage prime rate to 3.1%.

“All those people in variable rate mortgages, nothing happened [in terms of a central bank rate move] and TD changed their rates,” Laird said, though he acknowledged that  variable-rate products still save consumers money compared to fixed-rate alternatives around 90% of the time.

In a statement, TD Bank said “adjusting our rates is not a decision we take lightly. We look at a number of factors when determining rates including the competitive landscape, the cost of lending, managing risk and the Bank of Canada’s overnight rate.”

For more of Wealth Professional's latest industry news, click here.


Related stories:
How the Bank of Canada changed tack on interest rates
Bank of Canada makes interest rate announcement