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Wednesday, August 24th, 2016

RBC Signals That VRMs Too Costly

RBC, the nation’s biggest mortgage lender, has cut its variable rate discount by 0.20 percentage points. The change is effective tomorrow.

That lifts its advertised variable rate from 2.35% (prime – 0.65%) to 2.55% (prime – 0.45%).

Given that lenders travel in packs, it’s likely that some other banks and non-banks will follow suit and reduce their own discounts.

While this news will catch some by surprise, lenders have been suffering with razor-thin variable-rate margins for months. (See: Variable-rate Discounts Under Pressure)

At the moment, gross margins (spreads) on 5-year fixed rate mortgages are roughly 197 basis points—based on a 3.44% 5-year fixed.

Variable-rate margins are a whopping 51% less at roughly 96 basis points—based on prime – 0.85%.

Given the abnormally large ratio of people going variable today, banks like RBC are getting tired of relying on cross-selling to make variable-rate mortgages profitable. For monoline lenders it’s even worse because they have nothing to cross-sell.

RBC’s official response as to the reasoning behind this move was:

Mortgage rates are tied to the banks funding costs which change from day to day. Due to global economic concerns, the funding costs for banks have been increasing. While we have held off in passing on these high costs to our clients, it is now necessary for us to increase this (variable) mortgage rate.”

The takeaway, if you’re a consumer, is this: If you’re in the market for a variable rate, get a rate hold soon to be safe. While prime rate can always change, scores of lenders offer 90 to 180-day rate guarantees on thediscount to prime rate.

Rob McLister, CMT

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