TORONTO - Homebuyers hoping for another pullback in already low mortgage rates following this week's surprise quarter-point cut in the Bank of Canada's key overnight rate are likely feeling some disappointment.
The central bank's decision to push its usually trend-setting rate down to 0.75 per cent has made it cheaper for the country's commercial banks to borrow money, but that doesn't mean they will pass the savings on to customers by slashing prime rates, financial experts say.
At least, not unless the borrowing market forces their hand.
"The banks will charge whatever the market will bear, unless there's a change in demand," said Colin Cieszynski, chief market strategist at CMC Markets in Toronto.
"If people still accept the mortgage rates banks are offering now ... then it's a win for the banks."
When the central bank announced its rate cut on Wednesday, the widespread expectation was that lenders would cut prime rates to 2.75 per cent from three per cent.
Those hopes were quickly crushed when several of the country's biggest banks showed they weren't ready to budge.
TD Bank (TSX:TD) decided to hold its prime rate steady, at least for now, while both Royal Bank (TSX:RY) and Scotiabank (TSX:BNS) said they would consider their options but weren't making any immediate decisions.
Canada's financial institutions aren't required to move in lockstep with the Bank of Canada rate, which sometimes means they don't, especially if it negatively affects their lending divisions, which make up a significant chunk of bank profits.
If one major bank sees the opportunity to lure borrowers away from its competitors it may latch onto the lower rate, which would almost certainly trigger others to follow suit.
"If you saw one do it, then you may see the whole group" make similar moves, Cieszynski said.
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Several factors are at play when the banking industry considers how it lends to consumers.
Variable-rate mortgage rates are largely influenced by each commercial bank's prime rate, which finds direction from Bank of Canada rate decisions, but isn't a direct reflection on the benchmark rate.
Banks have traditionally have kept their prime rates within 25 to 50 basis points of the central bank.
The most recent exception was in December 2008 when the major banks reacted to the Bank of Canada's rate cut of 0.75 per cent by funnelling only part of that amount down to consumers — lowering their prime rate by 0.5 per cent.
Instances where the banks don't follow in lockstep with the central bank are rare, said Sebastion Patrizio, an adviser at Mortgage Intelligence.
"Historically every time the Bank of Canada rates move up or down the banks have a day or two later followed suit," he said.
"I would imagine that in the next day or so they'll probably start to drop those rates."
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