For those that missed it, there’s an interesting article over at Canadian Mortgage Trends – the major banks have done away with their variable rate discount mortgages and are now charging a premium over prime.
Prime + 0.10% (i.e., 3.10%) is an interesting number. A few months ago consumers thought that fat variable-rate discounts were here to stay. Variables above prime will now come as a shock to some people.
The banks are well aware of that. They know that pricing above prime impacts consumer psychology.
They could have priced at prime. Spreads are not that horrendous. But pricing above prime makes more of an impact. It makes higher-profit fixed rates more appealing and it mentally prepares consumers for potentially higher VRM premiums down the road.
That said, banks are not just arbitrarily sticking it to borrowers. The main reason variable rates are worsening is that banks’ costs are rising, and they want to recoup those costs.
Read the full article for more on the factors at play in this move.