Royal Bank of Canada is the latest lender to hike its fixed mortgage rates, applying a 20 to 30 basis point increase to a number of its special offer and posted offerings.
Effective Thursday, August 22, RBC’s rates will be as follows:
four-year fixed: 3.59 per cent (+20)
five-year fixed: 3.89 (+20)
seven-year fixed: 4.19 (+20)
10-year fixed: 4.59 (+30)
three-year fixed: 3.95 (+20)
four-year fixed: 4.74 (+20)
five-year fixed: 5.34 (+20)
Why Are Mortgage Rates Going Up?
Mortgage rates have been on an upward trajectory over the summer months, as a tightening government bond market and new CMHC restrictions have shrunk funding options for banks. As a result, the higher costs facing lenders are being passed down to the customer in the form of higher rates.
Bond yields, which indicate the level of investor interest in the Canadian economy, and are directly linked to fixed mortgage rate levels, continue to reach new highs. As of today, five-year bonds are yielding 1.92 per cent (compared to 1.69 per cent a month ago), and 10-year yields are at 2.68 per cent (up from last month’s 2.40 per cent range). High yields signal a decrease in investor interest in bonds, which has been waning since U.S. Fed Chairman Ben Bernanke insinuated moderation for the American bond buying program, a key part of its economic stimulus plan. This resulted in a mass exodus of investors from interest-sensitive investments – and while Bernanke has since assured that there is no recent end in sight for U.S. quantitative easing, it appears the damage to yields persists, for the time being.
A Securitized Credit Crunch
More recently, the CMHC, the crown corporation that provides insurance to high-risk borrowers, and guarantees the payment of their mortgages with the banks, introduced new limitations to the amount of guaranteed funds available to banks in August, with more restriction guidelines to come. This leaves banks taking on more of the risk in order to fund high-ratio (less than 20 per cent paid down) mortgages. As banks are generally very risk averse, economists predicted that they’ll hike their rates to cover these new funding challenges.
“The recent move by CMHC to cap mortgage-backed securities sold by banks will drive up the “cost of funds” faced by many banks. This will likely drive mortgage rates up by 0.2 per cent or more,” said Dan Eisner, President of True North Mortgage and member of RateSupermarket.ca’s Mortgage Rate Outlook Panel.
Setting The Trend
Ron Butler, panel member and mortgage broker at Verico Butler Mortgage pointed out impending change would need to be broached by a trend setting bank ready to make the first rate hike.
“…There will still likely be no change in rates. It will take close to a month for all the parties involved to feel their way around the new rules; this is not something all the lenders are used to like bond rate increases. This will take time – one lender will have to decide to jump first,” he stated on the expert panel.
While it remains to be seen whether RBC is reacting directly to the CMHC changes, higher rates look to be a reality for Canadian home buyers, with no sign of moderation in the near future. However, keep in mind that these big bank rates tend to be on the higher end of the pricing spectrum – as of today, the best five-year fixed rate can still be had for under three per cent (2.99 in Manitoba). It still pays to compare your options and score a rate that will help you save in the years to come.