Royal Bank Lowers Its Five-Year Fixed-Term Mortgage Rate To 3.74%

Royal Bank (TSX:RY), Canada's largest lender, has cut its five-year fixed-term mortgage rate by 0.15 percentage points to 3.74%.

Though a small reduction, analysts said that the move by Royal Bank is likely to prompt similar actions by other large Canadian banks in the coming days.

Banks finance mortgages for consumers by borrowing money from bond investors, and then lend it out to mortgage holders at higher interest rates. Those borrowing costs to the bank started falling last fall, a development that has yet to filter down to customers. In November, a five-year government of Canada bond was yielding at 2.5%. A few days ago, that had fallen as low as 1.75%, a drop of 75 basis points.

Analysts said that, based on activity in the bond market, Canada’s banks should reduce the rates they charge consumers on mortgages. Alternative lenders have already cut their rates, but since the big banks control 90% of the mortgage market, they can hold out longer.

For its part, RBC said a number of factors have impacted the Toronto-based bank's cost of funds, including the rate the bank pays in the bond market, increasing regulatory costs and market volatility. The impact of the rate decrease on consumers will be small, but could grow if it's the start of a trend.

The trend downward in fixed mortgages is even more interesting considering what's happening in the variable market, which is more pegged to the Bank of Canada's rate than the bond market. RBC raised the rate for its five-year variable mortgage to 3.55% on Wednesday, up from 3.30%.