Royal Bank Mortgage Rate Reduction: What does It Mean to Canadian Mortgage Consumers?

January 21, 2014

Mortgage application

Against the predictions of economists who expected an increase in Canadian mortgage interest rates in 2014, the Royal Bank of Canada (RBC), the country’s largest bank, reduced its mortgage rates this past weekend. The bank, which usually issues a press release to announce changes to mortgage products, quietly decreased its two, three, four and five year fixed mortgage rates by 10 basis points (bps) with no announcement to the industry.

RBC typically acts as the leader in mortgage rate pricing, which means it’s likely that other Canadian Banks will follow suit with rate reductions this week.

It is almost the end of January and most banks and financial institutions who offer mortgages are ramping up their marketing efforts to reach new customers who plan on buying or selling homes during the busy spring real estate market. Could this rate reduction by RBC be an indication of an upcoming rate-war among banks for customer acquisition in home financing? It’s too early to tell, but from a consumer perspective reductions to mortgage rates are always a positive thing.

What does a reduction of 10 basis points mean to mortgage consumers?

A “basis point” is used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent). For example, RBC reduced its mortgage interest rates by 10 basis points which means rates have been reduced by 0.10% percentage points. If 5-year-fixed mortgage rates were at 3.79%, and were reduced by 10 basis points, the new interest rate would be 3.69%.

So how much hard earned cash does this save Canadian customers?

Home buyers getting a new 5-year-fixed mortgage term at a reduced rate of 3.69% from 3.79% will save about $21 dollars a month on a $400,000 mortgage amortized (paid off) in 25 years.* At a glance, this might not seem like much, however, if you look at these savings over the 5 years of your mortgage term, you will be saving a total of almost $2,000 dollars. That’s enough extra cash to pay for a family vacation or to fund date nights for a year!

For consumer renewing their mortgage in the next 4 months or so, now’s a good time to take advantage of the current rate reductions. Most banks give you a 120-day early renewal option, which allows you to renew early without incurring any mortgage penalties. This could save you in interest costs if mortgage rates rise, as economists predicted, before your regular renewal date.

*Calculations are estimates, for educational purposes only and are based on a $400,000 mortgage, amortized over 25 years and comparing two mortgage rate scenarios: 5 year fixed mortgage rate of 3.79% vs. 3.69%. Estimates assume constant interest rate throughout the amortization period, and a monthly payment schedule with no additional payments or skipped payments.