What is going on with Variable Rates? October 2011

On August 26th we were offering a variable rate of P-.95% through ING Direct. Now the best ING rate we can offer is P-.05%. In just under 2 months the rate has moved up almost a full 1%. ING Direct is not the only bank making these dramatic pricing changes. We have seen all the lenders reduce the discount they are offering off of Prime to similar amounts. This list includes all the major players like RBC, TD, Scotia and CIBC.

Worse yet, according to a number of industry players, the banks may eventually reach P+1% on their variable rate products. We haven’t seen variable rates that high since Lehmann Brothers shocked the world with their expected bankruptcy. Within a month of the Lehmann Brothers bankruptcy the variable rate products shot from P-.9% to P+1%. Those were scary times.

Why is history repeating itself? This time fear is growing not over a bank debt crisis but over a sovereign debt crisis; namely, Greek sovereign debt. To be clear, the Greek banks are currently in fine shape, but that situation will change rapidly if the Greek government defaults under the burden of the nations incredible debt load. Bankers of the Euro Zone have been slowing waking up to this fact and are getting scared. No one is exactly sure how much exposure other European banks have to a Greek default and thus bankers are playing it safe and are starting to hide in their vaults.

What next? Unfortunately, we could see the variable rate discounts get even worse as fear builds. If the Lehmann Brother’s bankruptcy is a good case study, we will see unusually bad variable rate discounts for up to 6 to 12 months after the Greek nation (and perhaps others) default.


Dan Eisner AMP, MBA


True North Mortgage