Mortgage rates still remain low overall, but another major bank has announced a rise in mortgage rates, effective immediately. In a statement earlier this week, Royal Bank of Canada says it has raised its special offer five-year fixed mortgage rate to 2.94 per cent, and its four-year rate to 2.79 per cent – an increase of 30 basis points. Three-year fixed rates have also increased by 25 basis points to 2.69 per cent.
For amortizations greater than 25 years, the jump is even steeper. The five-year and four-year rates have risen by 40 basis points to 3.04 per cent and 2.89 per cent, respectively. The three-year fixed rate product has gone up by 35 basis points to 2.79 per cent.
How Will this Change My Mortgage?
To find out how much more these products will cost homebuyers, we used RateSupermarket.ca’s mortgage payment calculator to crunch some numbers. Therefore, if we take the average Canadian home price which currently stands at $481,994 and assume that a buyer puts 20 per cent down, these new rates will amount to this individual paying the following on a 25-year amortization:
- Five-year fixed rate mortgage: $59 more monthly, $703.52 more annually and $17,587.29 more over 25 years
- Four-year fixed rate mortgage: $59 more monthly, $697.21 more annually and $17,429.77 more over 25 years
- Three-year fixed rate mortgage: $48 more monthly, $578.37 more annually and $14,458.86 more over 25 years
And for 30-year amortization periods:
- Five-year fixed rate mortgage: $81 more monthly, $974.08 more annually and $29,221.81 more over 30 years
- Four-year fixed rate mortgage: $80 more monthly, $964.15 more annually and $28,923.81 more over 30 years
- Three-year fixed rate mortgage: $70 more monthly, $839.26 more annually and $25,177.19 more over 30 years
Those cost increases are substantial and can take a real chunk out of a homeowner’s budget. Depending on the market that the prospective homeowner is buying into, these numbers could be somewhat lower or significantly higher – especially in a red-hot market like Toronto’s.
Why is RBC Raising These Rates?
RBC cites turmoil in the bond markets following the U.S. presidential election as the reason for hiking fixed rates. According to Mary Ellen Brown, senior VP of home equity financing with RBC, these new rates reflect the “right balance between our clients’ expectations and our costs of funding mortgages”.
Brown adds that the mortgage market continues to be a low-rate environment that still gives many people the opportunity to buy a home. She says they have introduced new options to help Canadians pay down their mortgages faster.
Is This a Direct Result of TD’s Prime Rate Hike?
When TD Canada Trust hiked its prime rate from 2.7 per cent to 2.85 per cent earlier this month – affecting customers with variable rate products – many economists cited the new federal mortgage rules as the driving force. Because these rules make it more expensive for the banks to fund mortgages in Canada, the banks are required to raise the cost of borrowing – leaving the consumer with having to pay more. Since then, TD has raised its special offer for a four-year fixed mortgage by five basis points to 2.44 per cent, and for a five-year mortgage by 10 basis points to 2.69 per cent. These changes apply to all amortization periods.
Still, the new stress tests and tightened qualifications for mortgage applicants who put less than 20 per cent down means a greater cost of doing business. Therefore, the other three big banks – Scotiabank, CIBC and BMO – are likely to follow suit in the coming weeks. RBC and TD raising their rates is only the start of a domino effect through Canada’s mortgage market.
Related read: The new mortgage rules – one month later
The Greater Economic Picture
The immediate reaction to Donald Trump winning the presidential election was a huge sell-off in global bond markets, resulting from the expectation that his promised infrastructure spending and tax cuts will lead to higher growth. However, there’s also the fear that his time in office will lead to higher inflation and larger amounts of U.S. government debt. As a result, fixed rate mortgages throughout the U.S. are already on the rise. Looking further into the future, Mark Cabana, the head of U.S. short rate strategy at Bank of America Merrill Lynch says the move in bond yields could lead to tighter financial conditions – should this move continue too quickly. It appears we can expect continued volatility in the bond market going forward.
On the Canadian side, lenders may be anticipating a further reduction to the Bank of Canada’s overnight rate, which has sat at 0.5 per cent since July 2015. Some economists are hinting that this could happen at one of the upcoming Bank of Canada announcements in the next few months. As a result, both fixed and variable rate mortgages could see significant change in the coming months, reflecting both the Canadian and American economic picture as a whole.
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