Home > interest rates, personal finance > Variable Mortgage Rates – Rollercoaster

Variable Mortgage Rates – Rollercoaster

Variable mortgage rates are quoted based on a benchmark interest rate plus/minus (+/-) a spread. In Canada the benchmark rate is almost always the bank Prime Rate. The bank Prime Rate changes when the Bank of Canada changes the overnight rate.

Today, the Variable Rate Mortgage (closed) is quoted at 2.00% and the Prime Rate is 2.5% which means the Variable Rate is (Prime Rate – 0.5%). The 0.5% is referred to as the spread over prime rate… historically this rises and falls with the credit conditions in financial markets…

Since the 2007 this spread has been on a rollercoaster ride… from -0.9% in mid-2007 to +1% in 2008 and gradually falling t0 -0.5% currently… look at the chart below…

Chart of Spread between Variable Mortgage Rate & Benchmark Prime rate for the past 3 years

Source: Bank of Canada

Are these spreads justified? Why haven’t the spreads fallen to -1%?

Are the banks colluding to keep rates artificially high and boost their bottom line – increase in spreads has been a major cause for rising bank profits for past 12 months…

Am I missing something here or are banks raping customers blindly?

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