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The lesson home buyers should take from RBC’s mortgage rate hike

Signs outside the Royal Bank of Canada office towers at the north west corner of Front St. West and Bay St. on March 30 2015.

Fred Lum/The Globe and Mail

There's just one reason for the strength of Canada's housing market – low, stable mortgage rates.

Rates are still low, but the stable part is in question after Royal Bank of Canada announced a small but still significant round of mortgage rate increases that will take effect Friday. Other banks will likely adjust rates as well, after a brief period of letting RBC draw fire as the first to move.

RBC will increase borrowing costs on special offers for fixed-rate mortgages with terms of two to five years by 0.1 of a percentage point. For example, the five-year fixed rate will rise to 3.04 per cent from 2.94 per cent, enough to increase monthly payments on a $400,000 mortgage amortized over 25 years to $1,901 a month from $1,881.

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Higher payments aren't much of an issue – for now. Despite economic weakness that argues for stable or possibly even lower borrowing costs, mortgage rates appear to be facing upward pressure. Nothing startling, mind you. But the days of stable five-year fixed rates tucked nicely under the 3-per-cent threshold may be coming to an end at your neighbourhood bank branch.

Lenders are facing higher costs for financing mortgages as a result of new mortgage market rules introduced last year by federal regulators. As well, unsettled financial market conditions are forcing lenders to pay higher rates on the money they raise to lend out as mortgages. Canadian consumers are used to mortgage rates that closely track the state of the economy. But today's mortgage market is more complex than that.

Fortunately, competition in the mortgage business is intense. If there's one lesson home buyers and owners should take from RBC's rate increase, it's to never get a mortgage without cross-checking rates with at least one other source, preferably a mortgage broker with access to multiple lenders. A quick survey of mortgage brokerage firms Wednesday found five-year fixed rates as low as 2.44 per cent, which handily beats RBC's special prerate increase offer of 2.94 per cent.

A tip for people who plan to buy a house in the busy spring period: Lock in a mortgage rate now to eliminate the risk you'll be caught by any rate increases ahead. On the website, some lenders are holding their comparatively low current rates through early April or May.

There are lots of alternative mortgage lenders that beat the banks not just on rates, but also with much less onerous penalties if you have to break a mortgage before it matures. Also, you don't have to negotiate with these lenders. There's no need to get a line of credit or bring your investments over to get the best rate on a mortgage.

Another message to take from RBC's rate increase is that variable-rate mortgages are losing some of their appeal. In addition to raising costs on fixed-rate mortgages, RBC announced that the special offer on its five-year variable-rate mortgage will move to prime minus 0.1 of a percentage point from prime minus 0.25.

Fixed-rate mortgages have been the most popular lately, but there has until now been a case for going with the variable-rate option. Variable-rate mortgages are priced off the prime rate, which is influenced by the Bank of Canada's benchmark overnight rate. The central bank is nowhere close to raising rates, which means variable rate mortgages appeared to be safe from increases in the short term. Now, we see that this isn't the case. Both fixed and variable rates are still low in today's mortgage market, but maybe not stable.

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