Royal Bank of Canada Cuts Five-Year Mortgage Rates Following Lower Yields

Royal Bank of CanadaThough, financial institutions generally did not act on the Bank of Canada’s surprise move to lower overnight rates last week, the Royal Bank of Canada might have become the first major bank to react by lowering mortgage interest rates, initiating a rate cut on Saturday, January 24.

Royal Bank, which is Canada’s second-largest lender in terms of assets, apparently reduced its five-year mortgage rates from 2.94 percent to 2.84 percent as of January 24, according to RateSpy.com. This rate is substantially lower than RBC’s posted rate of 4.84 percent. Separate data from CanadianMortgageTrends.com also revealed that RBC’s three-year, seven-year, and 10-year interest rates on fixed mortgages were also reduced.

The bank is joining to a number of other Canadian institutions that are not changing their 3 percent prime rate, which is predicated on variable mortgages and lines of credit. In most cases, prime rates move in lockstep with the Bank of Canada’s overnight rates, which were reduced to 0.75 percent on Wednesday, January 21.

“We continue to review the impact of the Bank of America decision,” said Royal Bank of Canada spokesman Wojtek Dabrowski in an emailed statement made to Bloomberg. “Our individual product lines continue to make pricing adjustments in the regular course of business to ensure we provide competitive rates in the marketplace.”

On the other hand, fixed-rate mortgages, or FRMs, are predicated on bond yield changes. Five-year government bond yields dropped 17 hundredths of a percentage point on the same day that the Bank of Canada announced its rate cut, as they moved from 1.03 percent to about 0.86 percent. This is substantially lower than April’s figure of 1.8 percent.

According to quotes posted on Canadian news publication The Globe and Mail, the RBC’s decision to cut rates is possibly a record for a leading Canadian financial institution. Aside from the Royal Bank, other institutions that have slashed their rates in the aftermath of the Bank of Canada’s move to decrease overnight rates include Toronto-Dominion Bank (TD Bank), the Bank of Nova Scotia, and the National Bank of Canada.

Still, some mortgage authorities believe that RBC may have been one of the last major institutions to introduce new rates, as per the Globe and Mail report. According to National Bank spokesman Claude Breton, the institution “already offers competitive rates over the mortgage rate spectrum as we moved early over the past weeks.”

Though reports are mixed as to who was the first or among the last Canadian banks to reduce mortgage rates, it does seem clear that Canada’s top banks are likely to follow suit sometime in the coming weeks or months. For example, Bank of Montreal CEO William Downe said at a recent industry expo that the institution may launch a new product “that is appealing to customers.”

Interestingly, the Bank of Montreal was among those that had angered former Canada finance minister James Flaherty in 2013, when their “rate war” had resulted in what Flaherty dubbed a “race to the bottom.” And with Downe having sent those feelers and the RBC and others having reduced rates, some fear that this may further overheat the Canadian housing market and push it closer to a so-called “bubble” similar to the U.S. housing market crash of the late 2000s.