Yes, it’s true….yesterday, RBC lead the way with another interest rate hike on their 5 year fixed mortgage… followed by TD and Laurentian Bank…. It was a 0.15% increase for a new 5 year Bank Posted rate of 6.25%. This marks the 3rd increase in a month.
This latest rate increase is leaving many puzzled as the Bond Market has remained somewhat flat… the 5 yr Bond yield is currently 3.07%. A fully discounted 5 year fixed rate at TD can be had for around 4.79%.. that’s giving a huge spread of 1.72%… well above the 1.20% to 1.30% that Banks normally seek….
Okay, so why would the Banks increase the fixed rates? Sometimes Banks price themselves out of the market when they achieve their market share… and sometimes it’s just profit taking…. But don’t settle for these rates if you are looking for a Fixed rate.. the Broker Market is still offering much lower rates and the Variable rate mortgage can be had for around 1.70%….
Latest figures show inflation is not a problem…. The latest 12 month figures show inflation running at about 1.7% which is within the Bank of Canada’s 2% target rate….
Inflation is one of the biggest factors that affects the Bank of Canada’s key rate (the rate that affects Bank’s Prime rate)…..this is good news for Canadian borrowers as there has been a large amount of media coverage regarding the much-anticipated interest rates hikes…
Oh, and by the way… the Bank Prime rate still 2.25% (an all time low)… Why not just enjoy the low rates and not worry about what might happen in a few years?
I attended IMBA’s annual Mortgage Broker conference yesterday. IMBA is Ontario’s Mortgage Broker association. It was a good conference but it seemed to be a smaller crowd than in years past…..a result of the recession, I’m sure.
Nevertheless, it’s a great place to see all the Lenders and industry businesses in one location. I noticed a lot of smaller lenders were popping up and that’s a great sign for Borrowers as more competition is always good.
There were also lenders capitalizing on the new Mortgage Rules as CMHC tightened their lending policies earlier this week…. The smaller lenders fill a growing void for Canadians that want to buy an investment property or are self-employed and cannot provide traditional income verification. These lenders also signal improved confidence in the Canadian real estate market.
No surprise, the Bank of Canada did not raise their key rate today, keeping it at 0.25%. This rate directly affects the Bank Prime rate which is 2.25%. But as so many Economists have forecast, this appears to be the end of the record low Mortgage rates.
But it’s not that bad… we have enjoyed record low rates (almost free money, some would say) for well over a year.. and they are only starting to climb.. we’ll be enjoying low rates Variable rates for some time yet…
In it’s press release, the Bank of Canada stated “the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 per cent inflation target.”
The big question on everyone’s mind is how fast and by how much will rates increase… Here’s what to look for when it comes to what affects Variable rates:
- Inflation (the target rate is 2% and we are currently at 1.6%…if this increases then the Bank of Canada will want to increase the Bank rate)
- unemployment (currently sitting at 8.2% if we have higher than expected unemployment then this also puts pressure to keep the Bank rate low
- Canadian $ in relation to the $U.S. (today, the Canadian $ jumped over $1.016 and a high $ is bad for Exports and Manufacturing….the higher the Bank Rate, the higher $ will usually increase)
Fixed rates are more volatile as they are affected by the Bond Market… The Bond Market seems to have priced in a 50bps increase by the Bank of Canada as Bond Yields increased by 0.126% to 3.19% at the time this article was written. The Banks have increased Mortgage Rates by 0.85% over the past 3 weeks and should hold until the Bond yields increase to above 3.40% or 3.50%….Historically, the Banks want to earn a spread of around 1.20% and 1.30%.
If you tried to break your fixed rate mortgage or refinance in the last 16 months, then you probably found out the hard way the Big Six Banks and many other mortgage lenders (bu not all) calculate the penalty in one of two ways….
3 months interest penalty or Interest Rate Differential (IRD). Most mortgages fell into the IRD category… how does this work? Each Bank seems to have their own formula and I could find only one that posts the formula online….. TD Canada Trust’s formula is similar to most Banks… I’ll give TD Canada Trust credit for posting this calculator online….at least borrowers can go here and figure out the cost of early prepayment… take a few moments and calculate how much your penalty would be…
Here’s an example: $250,000 with 3 years remaining at 5.50% and where the branch gave you a 1.25% discount at the time the mortgage was first arranged…equals a penalty of $14,250. That’s equal to 12 months interest.…. Try the calculator yourself to see what your penalty would be….
The good news is that as interest rates climb it now becomes worth looking at getting out of the higher fixed rate mortgage products…..(probably a great time to be looking at variable rate mortgage with rates as low as 1.70%)