Canadian banks delivered the first clear sign that the era of rock-bottom interest rates is over by suddenly hiking mortgage rates, a move that will cost Canadians more to finance home purchases and likely hasten an expected slowdown of the red-hot housing sector.
Surging home sales and prices were already expected to cool in the second half of this year as more listings hit the market and the Harmonized Sales Tax adds to purchase costs in Ontario and British Columbia.
Hikes on fixed-rate mortgages announced by three banks Monday are expected to contribute to the slowdown as home buyers face higher costs amid a growing expectation that interest rates are likely entering a phase of higher levels.
The hikes are also expected to push some homeowners who have enjoyed ultra-low variable mortgage rates to lock in at set levels. Readings on inflation and the resurgent economy point to rate hikes within a few months by the Bank of Canada, whose trendsetting rate influences variable mortgage rates.
Royal Bank of Canada boosted the rate on five-year fixed-rate mortgages by 60 basis points to 5.85 per cent Monday, a move matched by Toronto-Dominion Bank. Rates on three- and four-year fixed-rate mortgages also rose by between 20 and 40 basis points (a basis point is one-hundredth of a percentage point). Laurentian Bank announced similar changes. Other major banks are likely to follow with rate hikes of their own.
The rate hikes carry the hallmark of a cyclical turn in mortgage prices as opposed to a blip, said Peter Routledge, senior vice-president of financial institutions at Moody's Investors Service.
“It's possible that we'll get a 10 or 15 basis point correction but the direction is up, not down,” concurred Canadian Imperial Bank of Commerce economist Benjamin Tal.
“This interest rate cycle has turned,” he said. “The next move will probably be another increase, although it won't be 60 basis points. It will be much more moderate.”
