The BoC rate stayed at 0.25% with the announcement yesterday, but it is likely to rise in June. What does that mean for you? First, if prime rate go up even 1% to 3.25%, clients will still get a rate of 2.95% on their current 5 year term (we are offering Prime minus 0.30% on 5 year VRM). Not a bad deal. Here is the technical stuff. Broker lenders usually set their prime rate based on the Bankers Acceptance (BA) rate, which is the rate that banks lend to other banks (right now it is at about 0.30%). They also want to set a "spread" above that BA rate that will pay costs and make some profit. This is reflected in how much below prime the banks set their Variable Rate mortgage (VRM) rates. As prime rate goes up, that spread will go up too, but not at the same pace. In other words, if prime goes to 3.25%, the BA rate micht only have gone up to 0.60% and so the banks can offer VRMs at maybe Prime minus 0.60%.
This won't happen right away, it will take a while. That is why my suggestion for a VRM term is the 3 year. Why? If the scenario above plays out, the increment below prime in 3 years will be well below Prime minus 0.30% so that when the client renews that mortgage in 3 years they could be getting that lower increment. Prime floats, so it is not a variable in this equation, only the amount below prime is a variable. And the data tends to say that we will see larger amounts below prime. Think back to 2 years ago and the VRMs were at Prime minus 0.60% or more. But prime was also around 4%.
