Canadian banks raise fixed mortgage rates, variable rates could soon follow

A Royal Bank of Canada sign is shown in the financial district in Toronto on Tuesday, August 22, 2017. THE CANADIAN PRESS/Nathan Denette
A Royal Bank of Canada sign is shown in the financial district in Toronto on Tuesday, August 22, 2017. THE CANADIAN PRESS/Nathan Denette

Several Canadian banks have increased their fixed-rate mortgage rates amid rising yields on the bond market and a strengthening economy, changes economists said could have repercussions for the housing market.

As of Friday, Royal Bank of Canada, Toronto-Dominion Bank and CIBC said they had raised rates between 10- and 15-basis-points. The banks tend to move in lockstep when it comes to raising rates.

RBC's posted five-year fixed mortgage rate moved to 5.14 per cent on Thursday, up from 4.99 per cent. The bank's special offer rate for a five-year fixed mortgage with a 25-year amortization moved to 3.54 per cent from 3.39 per cent.

RBC (TSX:RY) said the changes reflect the activity of competitors, costs for funds on the wholesale markets, as well as other costs and market considerations.

TD (TSX:TD) raised its five-year fixed rate to 5.14 per cent, the first time it has been above five per cent since February 2014.

CIBC raised fixed mortgage rates by between 10 and 15 basis points, effective Friday "in response to market conditions." Its five-year fixed rate rose by 10 basis points to 4.99 per cent, while the one and two-year fixed rates moved 15 basis points to 3.29 per cent and 3.24 per cent, respectively.

Scotiabank (TSX:BNS) said it is reviewing its rates and will likely soon make changes. Bank of Montreal (TSX: BMO) did not immediately respond, while National Bank (TSX:NA) said it had not yet determined its plans.

If enough banks raise their rates by the same amount it will raise the benchmark rate for stress tests, said Gregory Klump, chief economist of the Canadian Real Estate Association.

"That would definitely have a marginal impact on how much mortgage people can qualify."

The changes appear to most immediately affect those whose mortgages are uninsured because they had a down payment of 20 per cent or higher.

The stress test for homebuyers who don't need mortgage insurance requires them to prove they can make payments at a qualifying rate of the greater of two percentage points higher than the contractual mortgage rate or the five-year benchmark rate published by the Bank of Canada.

Those with insured mortgages must qualify at the Bank of Canada benchmark five-year mortgage rate, which was posted at 4.99 per cent and was last updated Wednesday.

Klump said the test and higher mortgage rates would have a dampening effect on markets with more expensive homes.

"The impact at margin would be greater in higher priced and active cities like Toronto and Vancouver than it would say in Moncton," he said in an interview.

Yields on the bond market, where the big banks raise money, have been on the rise since late last year as the economic outlook has improved.

Many economists are predicting that the Bank of Canada may raise its key interest rate target next week to 1.25 per cent from one per cent, a move that would likely prompt the big banks to raise their prime rates.

Increases in the prime rates push up the cost of variable-rate mortgages and other loans such as home equity lines of credit that are tied to the benchmark rate.

TD economist Dina Ignjatovic said Bank of Canada governor Stephen Poloz's statement that rate decisions will be based on data suggests higher interest rates are coming.

"In addition to the stellar jobs report released last Friday, this week's housing starts data showed that builders broke ground on a solid 217,000 new homes in December," she wrote in a report, adding that business sentiment was positive in the fourth quarter.

"Healthy hiring and investment intentions indicate underlying strength in the economy and less need for emergency level interest rates."

However, Ignjatovic said that additional rate increases won't necessarily come quickly in 2018 because of high household debt levels, uncertainty over new mortgage measures and risks associated with NAFTA renegotiations.

"We expect a gradual pace of tightening over the next two years, of about 25 bps every six months."

Avery Shenfeld of CIBC also expects a 25 basis-point increase on Wednesday despite the U.S. president's threats of ending NAFTA.

"It's not going to be scared off yet by some Donald Trump bluster," he wrote Friday.

Still, Shenfeld said a breakdown in NAFTA negotiations could prompt Poloz to go slow on further rate increases.

The Canadian Press. All rights reserved. 2018

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