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decoding the mortgage market

People choose variable-rate mortgages in hopes that rates will drop, or at least stay flat. For every time the Bank of Canada cuts its key interest rate one-quarter of a percentage point, those with variables save about $245 a year on every $100,000 of mortgage.

But what happens when the central bank lowers rates and the nation's lenders don't pass on the full savings? That was the case in January when, for the first time on record, major banks all failed to match a one-quarter percentage point rate cut by the Bank of Canada. (The country's benchmark prime rate is tracked here.)

It was a rude awakening for millions of variable-rate borrowers who thought that lenders had to follow the central bank's lead. But has it made variable-rate mortgages less attractive to mortgage shoppers?

The fact is, the central bank's rate cuts are little more than strong encouragement for financial institutions to lower their prime rates. What lenders actually do is entirely their call. Each lender sets its own prime rate based on short-term funding costs and competitive pressures. Most lenders used January's rate cut as an opportunity to boost their bottom lines.

A few lenders, however, put customers first. They followed the central bank's lead and passed along the full 0.25-point cut. Summerland Credit Union is one such lender. Unlike the major banks, who made us wait six long days for their decision to cut by a smaller 0.15 percentage points to 2.85 per cent, Summerland chopped its prime rates to 2.75 per cent within 48 hours of the central bank's cut. That's despite having less access than the banks to low-cost mortgage costs.

But credit unions aren't always competitive. Despite the benchmark prime rate – as tracked by the Bank of Canada – being 2.85 per cent, some credit unions are still advertising rates as high as 4.25 per cent.

Their variable-rate discounts can occasionally be deceiving as well. I remember one Ontario credit union in 2008 that advertised variable rates which were one-half a percentage point lower than the major banks. Unfortunately, borrowers who jumped on that "special" rate were outraged when this credit union refused to drop its prime rate like other lenders in 2009.

And then there was that other case in 2008 when banks pocketed one-quarter of a point out of a three-quarter-point central bank rate cut.

As you're likely surmising, one cannot assume that variable mortgage rates will track the central bank's overnight rate. Banks virtually always raise variable rates after a central bank rate hike, but borrowers have to hope they'll get the full benefit when the central bank cuts.

For some, this takes the lustre off of floating rates. While interest in variable-rate mortgages surged after January's surprise rate cut, it would have been significantly greater had prime fallen 0.25 percentage points instead of 0.15.

Granted, it's rare to see lenders not pass through central bank rate cuts in full, and it will stay rare. The exceptions that stick in our memory aren't enough justification to avoid variable rates altogether.

For if we are truly in a "low for longer" rate environment, the 0.60-percentage-point rate advantage – of today's variable rates over five-year fixed rates – could save many homeowners thousands.

Robert McLister is a mortgage planner at intelliMortgage Inc. and founder of

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