Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
per week
for first 24 weeks

Enjoy unlimited digital access
Cancel Anytime
Enjoy Unlimited Digital Access
Get full access to
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(}function setPanelState(o){dom.root.classList[o?"add":"remove"](,dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

For home buyers in bidding wars or seeking to consolidate high-interest debt, RBC’s rate increase matters.

Fred Lum/The Globe and Mail

Canada's mortgage-rate trendsetter, Royal Bank of Canada, hiked its posted five-year fixed mortgage rate Thursday.

In days gone by, I never would have written about this. Posted rate changes were no big deal.

Today, they are.

Story continues below advertisement

Government regulations now force most Canadians to prove they can afford much higher rates before getting approved for a mortgage. This "stress testing," as it's called, makes RBC's seemingly insignificant rate change quite consequential indeed.

It's been a long time coming

The Bank of Canada's posted five-year fixed rate is used for most mortgage stress testing in this country, and it has been four years since it last exceeded 5 per cent.

RBC's 15-basis-point increase to its posted five-year fixed rate could mark an epoch in Canada's mortgage qualification rate. If a few more Big Six banks follow its lead (and I think they will), the qualification rate will jump from 4.99 per cent today to 5.14 per cent next week, making the stress test even harder. (Update: TD followed RBC in hiking rates on Friday, raising its five-year fixed rate to 5.14 per cent.)

In fact, mortgage borrowers haven't had to qualify at rates that high since 2008 (back when government stress testing hadn't even started).

Assuming other banks follow RBC, a 5.14-per-cent qualification rate would cut a borrower's buying power (maximum mortgage amount) by roughly 1.4 per cent. For a household making $70,000 a year, that means a $4,000 to $5,000 smaller maximum mortgage. And the actual impact could be even more depending on the borrower's qualifications, contract rate, equity and whether they have default insurance.

Now, $4,000 to $5,000 less "mortgageability" may not sound like much, but when you're bidding against multiple buyers or desperate to consolidate high-interest debt, every $1,000 counts. That's why up to 5 per cent to 10 per cent of uninsured bank borrowers (that is, those with 20-per-cent-plus equity who can't pass the stress test) could migrate to credit unions this year. The higher the banks' five-year fixed rates go, the more borrowers they'll lose to credit unions.

Story continues below advertisement

The Bank of Canada's on deck

If bond traders are right, the prime rate will rise 25 basis points after Jan. 17. (A basis point is 1/100th of a percentage point.) That's because markets are pricing in a three-in-four chance the Bank of Canada hikes rates that day.

That, in part, has driven bond yields to four-year highs. And higher bond yields in turn drive higher fixed mortgage rates. But even if you knew higher rates were on the way, it wouldn't help you pick a mortgage.

While traders expected rates to jump 50 to 75 basis points this year – and they very well might – rate expectations change on a dime. For all anyone knows, rates could dive next year or in 2020, thanks to Canada's structurally low inflation, uncertainty over the North American free-trade agreement and housing headwinds, and hypersensitivity to interest rate hikes. That's why your average mortgage rate over five years is far more important than your rate this year.

The best approach to hikes

Forget all the noise, forget your personal rate outlook and focus on risk management. This advice works because long-term rate moves are random and unpredictable.

Story continues below advertisement

The central question should be: If your mortgage rate jumps one or two percentage points by the time you renew, can you handle a 5-per-cent to 20-per-cent leap in your payments?

If yes, you can still find variable rates as low as prime minus 1.25 per cent (insured) and prime minus 0.86 per cent (uninsured). Anything better than prime minus 0.70 per cent offers solid risk-reward in this economy.

If you can't comfortably handle a near-term jump in payments, you're probably more suited to a five-year fixed. That's not such a bad thing since the best five-year fixed rates are still below 3 per cent.

But five-year fixed rates below 3 per cent may not be around by year-end. So if you're heavily risk averse or need a preapproval, lock 'em while you got 'em.

Robert McLister is a mortgage planner at intelliMortgage and founder of You can follow him on Twitter at @RateSpy

Looking to buy a condo? Here are some things you need to know before you do

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to
Comments are closed

We have closed comments on this story for legal reasons or for abuse. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies