Canada’s biggest banks are hiking key mortgage rates at time when the bond market is worried about risk and the longer-term threat of inflation.
Royal Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, the Bank of Nova Scotia and Canadian Imperial Bank of Commerce are all increasing their posted rates on five-year, fixed-rate mortgages by 0.2 per cent to 5.45 per cent. The changes at RBC and BMO take effect today, while new rates at TD, Scotiabank and CIBC will be available as of tomorrow.
RBC, BMO and Scotiabank, however, also have “special offers” on five-year closed mortgages at 4.15 per cent. Those promotional rates, subject to change without notice, also reflect a 0.2 per cent increase.
Paula Roberts, a mortgage broker with Mortgage Intelligence, says rates are rising from “abnormally low” levels. Consumers, she added, still have plenty of opportunity to take advantage of lower borrowing costs because not all lenders have re-priced those loans.
“Even lenders that we were told were going to increase still haven’t,” Roberts said. “On a quick close (within 30 days) we can still get 3.69 (per cent). On a 120-day rate hold, we can still get 3.79 (per cent).”
Five-year, fixed-rate mortgages are traditionally the most popular option for homeowners. Borrowing costs on the bond market largely influence consumer rates.
Yields on longer-term bonds have soared in recent weeks, driving up the cost of borrowing for lenders. Experts say yields are rising because the bond market is focusing on risk and the future prospects for inflation.
Central banks usually try to control inflation by raising interest rates. The Bank of Canada’s overnight rate is currently sitting at 0.25 per cent and it has signalled plans to hold it there into 2010 depending on inflation.
The bond market, though, sees a risk that interest rates may change down the road, said TD economist Grant Bishop. “Certainly there is the recognition that interest rates are going to have to go up both because of the need to rein some of this monetary stimulus in once the economy gains traction and the level of debt that is being issued by governments.”
Yields are also climbing because the market is “a little less pessimistic” about the economic outlook, said David Power, a vice-president in RBC’s corporate treasury department. If bond yields continue to rise, that will impact the industry’s pricing of both mortgages and deposits, he said.
Statistics Canada, meanwhile, reported yesterday that household demand for credit dropped in the first quarter from the previous quarter. “Despite the decrease in the five-year mortgage rate, net new mortgage borrowing also contracted during the first three months of 2009, as investment in residential construction and activity in the resale housing market continued to decline,” its report said.
Bank of Canada data, meanwhile, suggests that household credit rose by 1.1 per cent in April over March, mostly because of growth in mortgages and lines of credit. “Even through these uncertain economic times, falling house prices and favourable mortgage rates appear to have successful attracted new homebuyers,” said a recent TD report.