Banks lower prime lending rates

The big banks dropped theirprime lending ratelate Tuesday, almost a week after the Bank of Canada cut its key lending rate. But they're not passing along the entire rate cut the central bank had announced.

Royal Bank wasthe first of the big banks to cut its prime since last Wednesday's surprise rate cut by the central bank. Other banks later matched Royal's move.

The banks trimmed theirprimes by 0.15 of a percentage point to 2.85 per cent. The Bank of Canada had cut its key overnight rate by aquarter of a percentage point to 0.75 per cent.

"We believe our announcement is a balanced approach which reflects our actual cost of funds and helps clients save money on products such as variable-rate mortgages, lines of credit and floating-rate loans," RBC said in a statement.

"Our decision was driven by a number of factors, including our wholesale funding costs, the competitive, operating and macroeconomic environments, and the Bank of Canadas recent rate decision and its impact on other market rates across the yield curve."

When prime rates fall, a whole range of floating interest rate loans like lines of credit and variable-rate mortgages fall in lock-step.

• Bank of Canada shocks markets with cut in key interest rate
• Joe Oliver says he won't meddle with banks' decisions on rates

Usually, when the Bank of Canada moves its key rate, prime rates quickly follow. But for sixdays, the banks didn't move their primes despite pressure from consumers looking for relief on their floating-rate loans.

Fixed-rate mortgages heading down

Fixed mortgage rates have already begunto drop slightlyat many banks. But longer-term fixed-rate mortgages depend on the bond market, not the Bank of Canadas overnight rate. With yields on longer-term bonds steadily falling and now at historic lows, its not surprising that fixed mortgages have begun to slide.

A five-year fixed mortgage now carries a posted rate of 4.79 or 4.84 per cent at several banks, down 0.10 or 0.15 of a percentage point overa week ago. Most borrowers will pay considerably less than the posted rates.

TD Bank, for example, on Tuesdaylowered its special fixed-rate offer for a five-year closed mortgage by a fifth of a point to 3.09 per cent. Many smaller lenders and independent mortgage brokers can offer even lower fixed mortgage rates.