Four of Canada’s Big Six banks have now raised their posted mortgage rates since last week, sparking concern by homebuyers and existing homeowners about the implications.
TD kicked off this round of rate increases last week by raising its various mortgage terms, including an astounding 45-bps increase to its 5-year fixed rate, which jumped from 5.14% to 5.59%. RBC, National Bank of Canada and CIBC have since followed suit, raising rates by 10–30 bps.
The question on everyone’s mind is: why are the big banks hiking, and why now?
The answer is partially related to Canadian bond yields, which rose to a seven-year high of 2.19% last week, and are now hovering around 2.14%. This has driven up mortgage borrowing costs for the banks.
But that doesn’t fully explain the extent of these hikes, RateSpy.com founder Rob McLister wrote in a Maclean’s article over the weekend.
“Funding costs have risen by less than half as much as TD’s increase on the five-year fixed mortgage. Something else would appear to be at play,” he noted. “It could be that TD is trying to influence rates higher to pad profit margins, or trying to coax more people into locking in. Or it could be trying to build reserves in a riskier housing market where national average home prices are down over 10 per cent in one year.”
Mortgage planner David Larock had another theory, which he wrote about on his blog, movesmartly.com.
Citing a recent CIBC survey that suggests up to 47% of all residential mortgages will come up for renewal in 2018, and the fact that mortgage renewers are now more inclined to shop around for more competitive rates, Larock wrote: “I think TD is losing an increasing share of its renewal business because the rates it is offering aren’t competitive, and instead of sharpening its pencil and lowering them (which would negatively impact profitability), the bank is using its posted rate to spike the MQR [Mortgage Qualifying Rate] and make it harder for their renewing borrowers to seek alternatives.”
For the bank’s part, TD spokesperson Julie Bellissimo said factors such as “competitive landscape, the cost of lending and managing risk” are taken into consideration when setting rates.
How New Homebuyers Are Affected
Despite the optics, the hikes are unlikely to affect the majority of new homebuyers, at least as far as their contract rate is concerned (i.e., the rate they are actually paying for their mortgage).
That’s because while the banks have raised their posted rates, their “special” and discretionary rates—that is, the rates available to most well-qualified borrowers—remain largely unchanged or just modestly higher.
But while a new homebuyer may still be able to secure a relatively competitive mortgage rate, the real challenge will be passing the new stress test, which is based on the benchmark qualifying rate, which in turn is based on the mode average of the Big Six banks’ 5-year posted rates (currently 5.14%). And that’s about to climb even higher on Thursday, although we won’t know by how much until the final two banks announce any additional rate hikes.
McLister noted that if the qualifying rate rises by 20 bps, it would lower a borrower’s maximum theoretical purchase price by roughly 1.5%.
How Existing Homeowners Are Affected
Existing homeowners could feel the effects of these rate hikes in two ways: a more difficult stress test to pass should they want to switch lenders at renewal time; and higher penalties should they wish to pay out their fixed mortgage early.
Concerning penalties, Larock summed up the financial implications of breaking a mortgage with TD with the following example:
“…let’s assume that TD lends you $300,000 today at a five-year fixed rate of 3.59% with a 25-year amortization. If you break that mortgage in three years’ time, and if rates have not changed, TD’s latest hike in their posted rate increases the penalty they will charge you from $10,228 to $12,715 (using some slight rounding). For comparison, a host of other non-Big Six lenders would charge you a penalty of $2,480 under the exact same circumstances.”
Variable Rates as an Alternative
With mortgage rates on the rise, consumers are taking a long, hard look at all of their options in search of ways to keep their costs down.
For certain borrowers, variable rates may be the answer. Some variable rates can still be found for as low as 2.21% for insured or 2.49% for uninsured, according to RateSpy.com
But that healthy discount compared to fixed rates could quickly evaporate following a few more Bank of Canada rate increases. And that looks likely, with markets still pricing in two more quarter-point hikes to the overnight target rate by the end of the year. That would increase monthly payments for those with adjustable-rate mortgages (ARM) and lines of credit.
As for the timing of the next hike, most analysts seem to agree that July is the most likely, though Derek Holt at Scotiabank says a May hike isn’t out of the question given that the BoC said at its last meeting it would monitor data very closely in the “weeks” ahead.
“To have attached such a firm and relatively short timeline measured in weeks to data dependency suggests that the risk of a May hike should not be ignored,” he wrote.
What Can You Do?
So what can you do in the face of rising mortgage rates?
McLister advises that homebuyers who are currently rate shopping would do well to get a pre-approval at today’s rates before they rise any further. He suggests they have the lender review their documents to ensure a full pre-approval as opposed to just a “rate hold.”
Those who already have a mortgage that’s coming up for renewal and who aren’t happy with the rate they’ve been offered by their current lender would be well-served by the expertise of a broker, McLister wrote. A broker can help compare the savings of breaking the mortgage early and locking in at a better rate elsewhere, or simply help negotiate a more competitive renewal rate.
“If you’re up for renewal and your bank is quoting a pitiful rate because it thinks you are less rate-sensitive, higher risk and/or can’t qualify elsewhere, phone a broker,” he noted. “There are a few different ways to avoid the stress test and brokers know the most tricks to do it.”