If Mortgage Rates Can Fall Through the "floor" of the Prime Rate...what Else is Under the Floor?

"Lower than prime," you heard someone say. Like most Canadians, you were probably first skeptical and then confused. We tend to think of the prime lending rate as the invisible "floor" of lending rates. The very best customers can get very close to that floor. It is theoretically possible, we reason, to actually be ON the floor, but not possible to be below it.

Nevertheless, Canadian lenders offer mortgages at prime minus 0.5% to even minus 0.7%. So the floor isn't the lowest you can go. There's something under the "floor". The rate known as "prime" has been the popular benchmark for lending in Canada. When business reporters talk about interest rate movement, they usually talk about what's happening with prime. But there are other benchmarks in money rates, though they are typically for use by professional money managers. The most significant of these is the Banker's Acceptance rate.

While "prime" is a set rate which is offered to a lender's best customers, the Banker's Acceptance is the rate which financial institutions use to lend money to one another. And it's typically well below the prime rate. Look for the "Money Rates"section of your favourite newspaper, and you can compare Prime with the Banker's

Acceptance rates for yourself. "Interesting," you think, "but why does it matter?" Well, as new lending institutions begin to offer a slate of innovative new loan options, a new mortgage has emerged that is based on the Banker's Acceptance rate: offering a mortgage rate of 1% over the 3-month Banker's Acceptance.

If you compared the rock-bottom prime-based variable mortgage rate - prime less 0.5% to 0.7% - with the new adjustable BA-based rate, you would find that the BA-based rate would have delivered significant savings over the past several years, as rates were dropping. There are two reasons for this. Firstly, the BA-based rates have historically been considerably lower than prime. Secondly, the prime rate tends to be "stickier" in an environment where rates are falling. Often, the more fluid, market-based BA rates deliver the rate change more quickly.

Any variable- or adjustable-rate Ontario mortgage is an excellent option when interest rates are either dropping or stable. Not surprisingly, they've been a very popular choice in the past few years. There are some rumblings now that rates may begin to increase, but flexible-rate mortgages still remain an excellent choice for those looking to save some interest.

As always, you should consult with a mortgage professional to find the mortgage that suits your personal financial needs. An independent mortgage broker can provide you with information on a broad range of mortgage options from a wide variety of lending institutions, so you can compare features and options at a glance.

And remember, it's worth taking some time to look beyond prime and explore what's "under the floor" in mortgage options!