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Royal Bank of Canada (RY-T) is hiking variable mortgage rates, seeking to pump up its profit margins as it becomes evident that interest rates will remain low for some time to come.
The country’s largest bank, which is also Canada’s biggest mortgage lender, said Tuesday that it is increasing the rates on its five-year variable closed residential mortgages by 0.20 percentage points. As a result, the price of its current special offer rate is now prime minus 0.45 percent.
Sources in the banking industry say that the profit margins banks are earning on variable rate mortgages have become extremely thin. And that’s becoming more of a problem for lenders because there are already signs that Canadians are piling back into variable-rate, as opposed to fixed-rate, mortgages.
That’s because expectations that the Bank of Canada will hike interest rates by a significant amount in the near future diminished recently after the U.S. central bank signalled that it intends to keep rates at rock-bottom levels well into 2013.
By making this move RBC is signalling that it is choosing profits over market share. While some rivals are likely to follow suit, other banks might choose to keep rates low in order to lure new customers, hoping that those borrowers will eventually lock in to a more profitable fixed-rate at the same bank.
A spokesperson for RBC said that mortgage rates are tied to the bank’s funding costs, which change from day to day. “Our long-term funding costs have gone up considerably due to global economic concerns and while we have held off in passing on these rate changes to our clients, it is now necessary for us to increase this mortgage rate,” the bank said.
The last time it adjusted the variable closed posted rate was in January, when it was decreased from prime minus 0.15 percent to prime minus 0.20 percent. That posted rate (as opposed to the special offer rate) is now prime plus 0 percent.