Why have Variable Rates Gone Up? Blame it on Bad Predictions

We’ve all seen it climb steadily for the past couple of weeks as first one bank, then another, then yet another started raising their variable interest rates on mortgages. Interestingly, the fixed rate has been getting a huge discount at the same time. But the fixed rate going down is just one reason why the variable has gone up. Another reason, a bigger reason, is due to the banks’ bad predictions about the prime rate in the first place.
When the Bank of Canada first lowered the prime to historically low levels, banks and lenders jumped on it, using it to lure more people to take on mortgages. And why not? It was a great deal for everyone all around! With the tiny exception, that is, of the lenders, who were losing a bit of those profits they’d been enjoying before the prime went so low. But – and this was their biggest mistake – they figured they’d get those profits back when the prime went back up. Which was going to happen soon, right?
Wrong. Mark Carney, governor of the Bank of Canada, announced just a few weeks ago that the prime was going to remain low in response to falling economies around the globe. While that was good news for banks and lenders, because it meant they could offer more people better mortgages, it also meant that those profits they predicted were now at least two years coming. And no business wants to, or can, afford to wait that long to get their profits back.
So what’s the answer?
Offering huge discounts on fixed rates, which are still higher than variable rates, is one way. But, reducing the huge discounts that were once offered is another. The good news? Variable rates, while maybe not as low as they were two weeks ago, are still very low, so homeowners aren’t feeling too tight of a pinch when it comes to their monthly mortgage payments. And fixed rates? Those are now extremely low too, albeit slightly more than the variable.
So it seems, while lenders may have made bad predictions about how the prime was going to act in the coming months, everyone still winds up a winner – lenders with slightly increased rates; and consumers who are still getting mortgages at very low rates.