Rising mortgage rates from big banks: what it means for you


Four of the six major Canadian banks have now increased their posted mortgage rates since last week, raising concern among existing buyers and homeowners about the implications.

TD kicked off this round of rate hikes last week by increasing its various mortgage terms, including an astonishing 45 basis point increase in its 5-year fixed rate, which went from 5.14% to 5. 59%. RBC, National Bank of Canada and CIBC have since followed suit, raising rates by 1030 bps.

The question everyone is concerned about is: why are the big banks working and why now?

Part of the answer lies in Canadian bond yields, which hit a seven-year high of 2.19% last week, and now hover around 2.14%. This has driven up mortgage borrowing costs for banks.

But that doesn’t fully explain the extent of those hikes, RateSpy.com founder Rob McLister wrote in one Maclean’s article this weekend.

Financing costs rose by less than half of TD’s increase on the five-year fixed rate mortgage. Something else would seem to be at stake, ”he noted. “TD may be trying to raise rates to increase profit margins, or trying to get more people to lock themselves up. hundred in a year.

Mortgage planner David Larock had another theory, which he wrote about on his blog, movemartly.com.

Citing the fact that mortgage renewers are now more inclined to seek more competitive rates, Larock wrote: “I think TD is losing an increasing share of its renewal business because the rates it offers are not competitive, and instead of sharpening its pencil and lowering it (which would negatively impact profitability) , the bank uses its posted rate to increase the MQR [Mortgage Qualifying Rate] and make it more difficult for their borrowers who renew the search for alternatives.

For her part, TD Bank spokesperson Julie Bellissimo said factors such as “the competitive landscape, cost of lending and risk management” are taken into consideration when setting rates.

How new buyers are affected

Despite the optics, the hikes are unlikely to affect the majority of new homebuyers, at least when it comes to their contract rate (that is, the rate they actually pay on their loan. mortgage).

Indeed, while banks have raised their posted rates, their “special” and discretionary ratesthat is, the rates available to the most qualified borrowersremain largely unchanged or just slightly higher.

But while a new buyer may still be able to secure a relatively competitive mortgage rate, the real challenge will be to pass the new stress test, which is based on the allowable benchmark rate, which in turn is based on the Big Six mode average. posted 5-year bank rates (currently 5.14%). And that’s about to climb even higher on Thursday, although we don’t know by how much until the last two banks announce further rate hikes.

McLister noted that if the qualifying rate increased by 20 basis points, it would reduce a borrower’s maximum notional purchase price by about 1.5%.

How existing owners are affected

Existing homeowners could feel the effects of these rate hikes in two ways: a more difficult stress test to pass if they wish to change lenders upon renewal; and higher penalties if they want to prepay their fixed mortgage.

Regarding penalties, Larock summarized the financial implications of breaking a mortgage with TD with the following example:

“…Suppose TD loans you $ 300,000 today at a five-year fixed rate of 3.59% with 25-year amortization. If you cancel that mortgage in three years and the rates haven’t changed, the last increase in their rate posted by TD increases the penalty they’ll charge you from $ 10,228 to $ 12,715 (using slight rounding) . For comparison, a host of other non-Big Six lenders would charge you a penalty of $ 2,480 under the same circumstances.

Variable rates as an alternative

With mortgage rates rising, consumers are carefully reviewing all of their options for ways to cut costs.

For some borrowers, variable rates may be the solution. Some variable rates can still be found for as low as 2.21% for the insured or 2.49% for the uninsured, according to RateSpy.com.

But this good discount to fixed rates could quickly evaporate following a few more rate hikes from the Bank of Canada. And it seems likely, with markets still forecasting two more quarter-point hikes to the overnight target rate by the end of the year. This would increase monthly payments for those with adjustable rate mortgages (ARMs) and lines of credit.

As for the timing of the next hike, most analysts seem to agree that July is the most likely, although Scotiabank’s Derek Holt says a hike in May is not out of the question given the BoC said at her last meeting that she would monitor the data. very closely in the “weeks” to come.

“To have attached such a firm and relatively short timeframe measured in weeks to reliance on the data suggests that the risk of a May hike should not be ignored,” he said. wrote.

What can you do?

So what can you do about rising mortgage rates?

McLister says homebuyers who are currently rate buying would do well to get pre-approved at today’s rates before they rise further. He suggests that they ask the lender to review their documents to ensure full pre-approval, as opposed to just “rate withholding.”

Those who already have a mortgage loan to renew and who are not satisfied with the rate offered by their current lender would be well served by the expertise of a broker, McLister. wrote. A broker can help compare the savings from breaking the mortgage early and getting a better rate elsewhere, or simply help negotiate a more competitive renewal rate.

“If you’re ready to renew and your bank offers a pitiful rate because they think you’re less rate sensitive, are at higher risk, and / or can’t qualify elsewhere, call a broker. “, He noted. “There are many ways to avoid stress testing and brokers know most of the tips for doing it. “


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