Royal Bank of Canada has become the first of the major banks to lower its posted interest rate for five-year fixed-term mortgages, a move that has been widely anticipated amid tumbling bond yields.
The bank lowered its featured five-year mortgage rate on Wednesday to 3.74 per cent from 3.89 per cent. Other big banks did not immediately match the rate, but mortgage expert Robert McLister, founder of mortgage-rate comparison website Ratespy.com, said others will move soon.
He said alternative lenders who compete with the big banks have already been lowering their rates for weeks, giving them a slight advantage in the market. Mr. McLister anticipates the major banks will settle their featured five-year fixed rates at about 3.64 per cent in coming days.
He said some big banks have already lowered their internal “discretionary” rates on five-year fixed terms for preferred clients, but RBC is the first big bank to lower its publicly posted rate since August last year.
The move comes as the yield on five-year Government of Canada bonds has fallen sharply since November. Banks base their fixed mortgage rates on government bond yields.
Five-year bond yields have fallen from a recent high of 2.46 per cent on Nov. 8 to 1.93 per cent as of Wednesday, a decline of more than half a percentage point.
While fixed mortgage rates are getting cheaper, variable-rate mortgages have been getting more expensive, narrowing the gap between them.
Variable mortgage rates fluctuate with movements in the Bank of Canada’s overnight lending rate, which is linked to banks' prime lending rates. But a typical variable mortgage rate is also affected by the amount of discount banks offer to their prime rate for new clients when they are negotiating new variable-rate mortgages.
Some big banks are cutting the amount of discount to prime that they offer preferred clients on new variable-rate mortgages, which is pushing variable rates higher for new clients. Royal Bank, for example, raised its variable-rate mortgage rate by 25 basis points on Wednesday, Mr. McLister said. (A basis point is a one-hundredth of a percentage point.)
Mr. McLister said a typical spread between a big bank’s five-year fixed rate and variable rate mortgages has declined to 35 basis points from 104 basis points in November, making variable mortgages less attractive for many home buyers weighing the merits of locking in with a fixed-rate mortgage. He said banks are happy to shift more borrowers into fixed-rate mortgages because they are more profitable for the banks under current conditions.