Homes for sale in Toronto's Beach area June 13, 2012.Moe Doiron/The Globe and Mail
Royal Bank of Canada, the country's largest mortgage lender, is raising its rates and analysts say other banks are likely to follow suit, leaving the threat of a mortgage rate war firmly in the past.
The special rate on RBC's four-year closed mortgages will now rise 10 basis points, to 3.09 per cent, while its five-year special rate will rise 20 basis points to 3.29 per cent. (A basis point is 1/100th of a percentage point.)
The posted rate on a one-year mortgage is going up fourteen basis points to 3.14 per cent, while the posted rates on two- and three-year mortgages are each rising by 10 basis points, to 3.14 and 3.65 per cent respectively. The new prices take effect June 10.
Mortgage rates became a major point of contention earlier this year when some lenders ratcheted theirs down to all-time lows, and received a scolding for doing so from Finance Minister Jim Flaherty, who has been trying to cool off the housing market. When Manulife Bank cut its posted rate on five-year fixed-rate mortgages to 2.89 per cent in March it received an angry phone call from Mr. Flaherty's office and quickly pumped its rate back up to 3.09 per cent. Bank of Montreal allowed a special rate of 2.99 per cent to expire amid the controversy.
At an event in Halifax on Thursday Mr. Flaherty said the banks are now being very "prudent in not reducing their rates."
But with the spring selling season coming to a close, it's looking more likely that long-term interest rates are going up. Royal Bank, which often changes its mortgage rates before the other banks do, said Friday its rates will rise.
Long-term interest rates, specifically the movements of five-year Government of Canada bonds, are one of the factors that determine how much the banks have to pay for the money that they lend out to mortgage borrowers. The yield on five-year bonds was 1.44 per cent Thursday, compared to 1.30 at the end of March.
"Royal Bank typically sets the market, they're sort of the price leader," said National Bank of Canada analyst Peter Routledge. "So it would not surprise me at all if their competitors followed. In fact, it would surprise me if they didn't."
He noted that the ultra-low rates that some banks were promoting in March occurred at a pivotal time in the year for the banks, which have been seeing slower growth in their massive mortgage portfolios since home sales entered a slump last summer. "Those promotions were done before the spring market to lock in customers during the spring market," Mr. Routledge said. "The spring market is nearing a close, so now here we go."
Indeed, bond rates have been rising for more than a month now and some observers expected mortgage rates to follow suit sooner.
But, while it seems the mortgage rate race-to-the-bottom that worried Mr. Flaherty has been called off, some observers say that Royal Bank's competitors might hold off matching the rate increase for a little while yet.
"We are not surprised RBC raised their mortgage rates on the heels of a recent spike in bond yields – this follows the historical trend," said Alyssa Richard, the CEO and founder of Ratehub.ca. "We cannot be sure all other lenders will follow, given that overall mortgage volumes are slowing in Canada. Some lenders may choose to sacrifice [profit] margin for volume."