RBC, quite possibly North America’s most profitable bank, has just hiked their mortgage rate. However, will the rest of the financial big boys follow suit (they usually do) is anyone’s guess.
The intriguing question at hand is why will they rest hike the rate accordingly when the overall mortgage market is shrinking ?
Are Canada’s mortgage wars over?
By Jennifer Kwan | Balance Sheet
Fixed mortgage rates are heading higher. Royal Bank of Canada, the country’s largest mortgage lender, was the first to hike its rates, lifting the popular five-year fixed mortgage rate by 20 basis points to 3.29 per cent on Monday. In recent days, TD Canada Trust and Laurentian Bank followed. Who will be next to hike rates is anyone’s guess.
While the higher mortgage rate environment can be a scary prospect for consumers, there is a plus: it can force people to save longer before they buy a house and ensure sky-high debt levels are kept in check in order to avert the broader ill effects on the economy that many policymakers have been hand-wringing about for months. Record-low fixed mortgage rates couldn’t stick around forever.
“For the consumer, while it’s going to make it more difficult for them to afford a mortgage, it’s always a good idea to go back to the savings drawing board to secure a higher down payment,” said Penelope Graham, a spokeswoman for Ratesupermarket.ca.
“Higher mortgage rates could dissuade Canadians en masse from taking on more debt than they can handle. That can absolutely be seen as a positive.”
Why are rates rising?
Fixed mortgage rate levels are closely tied to investor appetite for government bonds, which have been on the rise. There are a number of reasons for that, chief of which is the fact that the market generally believes the U.S. Federal Reserve is in the process of winding down its so-called quantitative easing measures, or effectively the buying of bonds to grease the economy.
That means bond prices are not going to get the support they’ve had in the past. “Lower prices means higher yields and that’s what we’re seeing,” said Benjamin Reitzes, a senior economist at BMO Capital Markets. “Our markets largely trade together.”
When bond yields are low it’s a sign that investor appetite is strong and suggests Canada’s economy is a less-risky investment. This gives Canadian banks stability and liquid funds at a lower cost, meaning the savings are passed down to borrowers in the form of lower rates.
On the flip side, low investor interest causes credit among banks to seize up, and rates are hiked to cover the increased cost of borrowing. Canada’s Finance Minister Jim Flaherty has been using his very-public profile to hammer the point for months, with mortgage rates coming under the spotlight earlier this year when some lenders reduced theirs below 3 per cent. That prompted fear about a race to the bottom and a publicized scolding from the finance minister.
Yet even as rates go up, the mortgage lending environment remains highly competitive. RBC’s trend-setting hike to 3.29 per cent on the five-year represents a 55-point spread between the current very lowest five-year fixed rate offered on the market of 2.74 per cent, according to Ratesupermarket.
“Rates are increasing, but they’re due to regular economic factors. It’s still a really good time to walk into a fixed mortgage rate,” said Graham. Translation: lock in now.
As for variable rates, it appears economic conditions have not recovered sufficiently to alter the current cost of borrowing and markets generally do not anticipate the Bank of Canada to change the overnight lending rate until late in 2014. The central bank’s new governor, Stephen Poloz, could give some further hints on guidance when he delivers his first public speech next week.
Who will be next to hike fixed mortgage rates is anyone’s guess, but market watchers say the trend upward is inevitable so get that clear in your head and start to budget accordingly.
Well, it’s probably a good idea to lock up your mortgage whether or not there will be a a mortgage rate hike across the board ? Because it does look like the rate has nowhere else to go but up …
Smart borrowers today work on the assumption that the answer is no. The question, then, is how to best keep mortgage costs low today while also protecting against future increases.
Let’s consider the lock-in option, first. That’s where people with variable-rate mortgages convert at no cost into a fixed-rate mortgage, and new home buyers go with a five- or 10-year fixed rate mortgage. It happens to be an excellent time to lock in, even if some banks have boosted their special five-year fixed mortgages rates by 0.2 of a percentage point this week.
The banks were responding to a big runup in the yield on the five-year Government of Canada bond, which sets the trend for five-year mortgages. But thanks to a highly competitive mortgage market, lower rates are still available. Kim Arnold, a broker with Dreyer Group Mortgages in Vancouver, said earlier this week that she was able to get a very competitive five-year rate of 2.89 per cent for clients.
“Rates are phenomenal, even with this latest increase,” she said. “It’s certainly not a bad time to lock in.”
David Larock of Integrated Mortgage Planners in Toronto sees zero urgency for locking in, mainly because of the potential for yet another global economic scare to send rates lower. Europe’s problems with high government debt levels and slow economic growth could do it. So could Japan’s rickety economic fundamentals, worry about weakening growth in China or uncertainty over the sturdiness of the U.S. economic recovery.
Low inflation is another constraint on rate increases, Mr. Larock said. “I think the Bank of Canada is probably more concerned about getting inflation to go up as opposed to going down.”
It’s this line of thinking that leads Mr. Larock to make a case for the variable-rate mortgage, where your rate rises and falls along your lender’s prime rate.
The prime, in turn, is guided by the Bank of Canada’s benchmark overnight rate of 1 per cent, which hasn’t moved since September, 2010, and is expected to remain steady until the latter half of next year.
“The prime rate moves when the Bank of Canada changes their rates, and they’re not going to jump around like the market does in terms of what happens with five-year Government of Canada bonds,” Mr. Larock said. “These bonds are subject to the vagaries of large institutional investors, and to the ebb and flow between the stock market and bonds.”
Another reason to look at variable-rate mortgages is that the discounts have improved recently. Mr. Larock said it’s now possible to get a variable-rate mortgage with a discount of as much as 0.5 of a point off prime in some provinces.
That means a rate of 2.50 per cent, which compares to a range of 2.72 to 3.29 per cent for discounted fixed-rate mortgages over five years, depending on which lender you deal with.
If you go with a variable-rate mortgage, you’re vulnerable to the short-term rate increases the Bank of Canada will eventually start using to keep economic growth under control.
Toronto-Dominion Bank’s economics department expects a half-point rise in the overnight rate in the fourth quarter of next year.
As for five-year fixed rates, they could retreat again in the weeks and months ahead if there’s another global economic scare. But TD chief economist Craig Alexander said the broader trend in the bond market is the start of a move toward more normal levels. Next year, he sees the five-year Canada bond yield at 1.85 per cent, up from 1.60. “I think bond yields are going to grind higher, but 1.85 per cent on a five-year Government of Canada bond is still incredibly low.”
The best strategy for most people today is to lock in quickly to today’s best five- or even 10-year rates (read my case for the 10-year mortgage online at tgam.ca/DqYG). As Ms. Arnold, the Vancouver mortgage broker, put it, “I don’t honestly think anyone can make a mistake by locking in.”
Mortgage Rate Survey
A range of best rates available from banks and through mortgage brokers
|Best rates available (%)
|2.50 to 2.60
|2.39 to 2.59
|2.49 to 2.69
|2.49 to 2.69
|2.69 to 2.89
|2.72 to 2.89