Mortgage rules start to bite as TD hikes rates

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One of Canada's largest banks is raising rates on some of its mortgages amid tighter federal mortgage-insurance rules and mounting concerns about soaring home prices.

Toronto-Dominion Bank said it has increased its prime rate for variable-rate mortgages by 15 basis points, to 2.85 per cent from 2.7 per cent, starting on Tuesday. It is the first change to a prime rate since July, 2015, when TD and other major banks slashed their rates 10 to 15 basis points after the Bank of Canada lowered its overnight rate. (A basis point is 1/100th of a percentage point.)

"We regularly review our rates and adjust them based on a number of factors, including the cost that TD pays to fund mortgages," bank spokeswoman Cheryl Ficker said in an e-mailed statement. "Increasing our rates is not a decision we take lightly. We consider the impact on our customers before proceeding with any rate change, and we communicate directly with customers whose loans or mortgages are affected."

The increase does not affect fixed-rate loans or home equity lines of credit.

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TD's move comes in the wake of new rules affecting insured mortgages as well as regulatory changes to capital requirements for banks, which are expected to raise costs for mortgage lenders.

Last month, Finance Minister Bill Morneau announced higher qualifying rates for mortgages with down payments of less than 20 per cent along with restrictions on the types of mortgages that can be covered by government-backed portfolio insurance.

The Office of the Superintendent of Financial Institutions also rolled out new rules that will require lenders to hold more capital against riskier mortgages. Those rules kicked in at the start of the fiscal year, which for most major banks is Nov. 1.

Collectively, those changes are expected to make it most costly for financial institutions to lend against housing. However, analysts have predicted that the new rules will hit non-bank lenders the hardest.

The S&P/TSX banks subindex rose to its highest level since 2014 as investors expected the Big Six banks to be the major beneficiaries of the new housing finance rules. "The market's view is that under the more stringent regulations, banks will be able to capture market share from non-bank lenders, who currently supply about a third of the market for new mortgages in Canada," National Bank of Canada economists wrote in a report on Tuesday.

Other major banks left their mortgage rates unchanged on Tuesday. While the banks tend to quickly match rate changes by competitors, TD is unique among Canadian banks in that it has two different prime rates: one that affects floating-rate loans, such as lines of credit, and one that is specific to variable-rate mortgages. TD left its bank-wide prime rate unchanged.

Consumers with existing TD variable-rate mortgages will not see their monthly payments rise, but more of their payments will go toward interest rather than principal, meaning that it will take them slightly longer to pay off their loans. The bank said clients could increase the frequency of their payments or opt for an early renewal into a fixed-rate mortgage instead.