Here is a very good analysis of this week's Bank of Canada (BoC) Overnight Rate reduction, how the banks reacted, how this plays into Inflation, possible implications on the housing market, and more.
Important to understand: The Big-6 banks fund roughly 75% of the money required to fund their Variable Rate mortgages from their Balance Sheets. This means that money comes from your deposits. Those deposits have a cost of nearly zero. So only 25% or so of the money comes from borrowing on the Overnight Rate. This means that when Prime goes down the banks actually are experiencing reduced margins on those Variable Rate mortgages. Not that I think those Big-6 banks aren't making enough profits. I think they get away with this because
- They have too much power in me marketplace due to too little competition, and
- Because they have too much influence with the Federal Gov't, and
- Because Canadians are not willing to raise a great commotion over this. If this was happening in the USA the level of competition would preclude the banks from holding back any of the reduction, and if they tried the American population would revolt.
A key take-away from a recent article in Canadian Mortgage Trends: "The last thing rule-makers want is a housing calamity. The second-last thing they want is to be seen as not being proactive before a housing calamity. For that reason, the odds that tighter mortgage guidelines are on the way have just leaped." Read the entire article here Rate Reflections