The Bank of Canada recently lowered it's key lending rate, meaning that banks can borrow for lower rates. In the past, this usually meant savings for people looking to purchase a home or refinance an existing one. Today, it doesn't mean much if you are in the market for a mortgage.

Up until a few months ago, many borrowers were receiving discounts on the bank's prime rate. I would see many clients with an interest rate of Prime minus 0.75%. At  the time, the prime rate was around 5%, meaning that they would effectively be paying 4.25% Recently, I have seen borrowers with stellar credit only be able to obtain Prime PLUS 1%. While the prime rate has dropped to 3.5%, it means that they are paying 4.5%, which doesn't sound so bad until you realize that the bank is increasing it's profit margin for the preferred clients while declining those who are not as desirable from a credit risk standpoint.

What this means is that the banks are not passing on proportional savings to the average consumer. The Bank of Canada wants to offer lower rates to get the economy moving, but the banks are preventing that by lining their own pockets. I recognize that banks are in the business of making money, but they should really be focusing more on institutional efficiency rather than abusing government policy.

The only affect this will have on the average consumer is a negative one. Since it is now costing the bank less to borrow from other sources, there is no reason for them to borrow from consumers who have savings accounts. Therefore, if you have a savings account, don't expect to get as much interest from the bank in the next little while. It seems to be counter-productive to the new tax free savings account that was supposed to encourage savings, but given how government works, I shouldn't be surprised.

        

 

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