Three of Canada's largest banks are raising rates on some fixed-rate mortgages, a reminder that mortgage rates can go up before the central bank's key interest rate does.
The move comes as many Canadians with variable-rate mortgages have been anxiously watching for signs of exactly when the Bank of Canada will begin hiking interest rates, in a bid to wait and lock into a fixed-rate mortgage at what they hope will be the ideal time.
Royal Bank of Canada RY-T , the country's largest bank, said Monday morning that it is raising the rate on three-year closed fixed-rate mortgage by 0.20 percentage points to 4.35 per cent. The four-year closed rate will increase by 0.40 to 5.34 per cent, and the five-year closed rate will rise by 0.60 percentage points to 5.85 per cent.
RBC's Canadian mortgage portfolio amounted to about $148.5-billion in the latest quarter.
A short time later Toronto-Dominion Bank TD-T followed suit, saying it is raising its three-year closed fixed-rate mortgage rate by 0.40 percentage points to 4.70 per cent, its four-year rate by 0.40 percentage points to 5.34 per cent and its five-year rate by 0.60 to 5.85 per cent.
Laurentian Bank LB-T also announced it would raise rates.
A spokeswoman for Royal Bank said that fixed-rate mortgages tend to move when bond yields move.
“The rates are tied to our funding costs, which change day to day,” she said. “Our long-term funding cost has gone up significantly since December.”
The biggest increase announced Monday affects five-year mortgages. All three banks are hiking their posted rate by six-tenths of a per cent to 5.85 per cent from 5.25 per cent.
A homeowner taking on a mortgage of $250,000 at the new posted rate of 5.85 per cent over a 25-year amortization period would pay $1,577 per month. Prior to Tuesday's hike, that mortgage would have cost $1489 a month, or $88 less.
Sal Guatieri, a senior economist at Bank of Montreal, said the driving force behind the change in Canada's bond market is the notion that the Bank of Canada might need to raise interest rates sooner than previously thought. The market's expectation is pushing up bond yields.
Mr. Guatieri still believes the central bank is on track to raise rates in July, but he acknowledges that further strong economic reports could cause the bank to move sooner.
Rising rates present a dilemma for many homeowners who face decisions about whether to lock variable rate loans into fixed terms or ride it out and hope that rates will come down again in 2011 as the economy slows and inflationary pressures subside.
Potential homebuyers entering the market also must consider rising rates when they decide to bid on a house. Is it better to wait until rising rates have cleared out some potential bidders or will a flurry of buyers and sellers spooked by the prospect of higher mortgage costs affect the supply-demand balance?
Historically, staying short-term and flexible has been the best strategy, but banks usually advise that locking in at still-attractive longer-term rates of five years and more is always a good bet for many consumers who want to ease their risk.
If the current bank prime rate of 2.25 per cent rises by 2.5 percentage points to 4.75 per cent, a homeowner with a variable mortgage should expect to pay about 30 per cent more on their monthly mortgage, says Robert McLister, a mortgage planner and editor of the Canadian Mortgage Trends website.
“If that causes you discomfort then perhaps a fixed rate's where you want to be and if a fixed rate is where you want to be...if you're closing in the next six months, I suggest people do that quickly.”
Generally, long-term fixed rates rise by about half of the variable rate, he said.
