BMO lowered it’s 5-year variable rate to prime (2.25%) today.
It’s the first of the Big 5 banks to offer variables at prime in about a year.
BMO’s press release calls it the “lowest rate in more than 30 years.” This apparently refers only to BMO’s own variable rates, since prime and “prime minus” are already being advertised by brokers.
Other banks will likely follow BMO’s lead, perhaps some sooner than others. The prime – BA spread is wide enough to permit it.
Terminology: The “prime-BA spread” is simply prime rate minus the 30-day bankers’ acceptance yield. In very raw terms, it represents gross lender margins on variable-rate mortgages. From this spread, lenders have to pay liquidity/risk premiums (when raising lending capital in the credit markets), customer acquisition costs, overhead, salaries, etc. The remainder is profit.
The prime – BA spread is currently at 1.95, whereas it averaged ~1.70% before the credit market went haywire last October.
Incidentally, the 1/4% gap between today’s spread and the historical average corresponds to the 1/4% that lenders felt unable to pass along to consumers when the BoC cut rates last December.
Last modified: April 28, 2014
Could someone please tell me where brokers are advertising “Prime Minus” because I can’t find them. I live in the Ottawa area.
PS- Walked into a BMO downtown Ottawa yesterday and none of the frontline staff knew about the new prime rate variable. How are the other banks going to feel pressure to match and/or beat that when it is not being advertised enough. I want to move up from a townhouse to a single detached but it is very hard to move on from my “Prime -.50” from Scotiabank. So everyone cheer on BMO and the rest of the laggards, RBC, TD, Scotiabank and CIBC, get your acts together!!!
Sounds like you approached the wrong person at the bank. Front line staff at any bank serve the clients and their transaction needs.
It’s the Personal Bankers who have the training, experience, system access and who are up to speed on investments, mortgages and loans and better able to advise clients appropriately.
By the way, it wasn’t 25 bps that the banks failed to pass on, it was 50.
Hi Aaron, The Bank of Canada lowered it’s overnight target 4.25% but prime came down only 4%. That’s the 1/4% we’re referring to.
Cheers,
Rob