Toronto-Dominion is raising mortgage rates again -- and this time the lender is going much farther than its recent hikes.
Starting December 1, all fixed rate mortgages that take more than 25 years to pay back will cost borrowers an extra 10 basis points, or 0.1 per cent. TD is also implementing an extra cost for mortgages on rental properties, charging borrowers 25 basis points more.
The changes follow Royal Bank of Canada's precedent-setting decision early in November to hike rates, and to also charge more for lengthy mortgages. The latter move marked the first time such a policy was implemented in Canada.
In response, TD increased its own fixed-mortgage rates a week later, but took a more measured approach. Royal Bank hiked its fixed five-year mortgage rate by 30 basis points, to 2.94 per cent; TD raised its equivalent rate by only 10 basis points to 2.69 per cent.
TD recently raised the same mortgage rate again, to 2.84 per cent, but still opted not to charge more for loans that take longer than 25 years to repay.
With its latest move, TD is following its main rival's lead, and then some. A higher rate for rental properties is something new.
"We regularly review our rates and adjust them based on a number of factors, including the cost that TD pays to fund mortgages, and the competitive landscape," the bank wrote 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."
RBC and TD's rate decisions matter because they come from the country's two largest banks, whose mortgage portfolios are worth roughly $400-billion combined. It is common for them to move in lockstep when adjusting mortgage rates, and what they decide often serves as a benchmark for the rest of the market – but not always.
Lately, Canadian banks have had to re-think their mortgage rates because of moves in bond markets as well as policy changes in Ottawa.
Since November 1, the five-year Government of Canada bond has seen its yield jump 30 basis points. Banks earn a spread off of this five-year benchmark rate, and when their borrowing costs rise, they usually pass the increase along to customers.
Ottawa is also trying to crack down on easy lending standards that have been blamed for large increases in home prices in some markets, particularly Vancouver and Toronto. In October, Finance Minister Bill Morneau announced higher qualifying rates for mortgages with down payments of less than 20 per cent, as well as restrictions on the types of mortgages that can be covered by government-backed portfolio insurance.
The latter change is likely to have fostered the new rates for different amortization lengths because mortgages that take more than 25 years to pay back no longer qualify for bulk mortgage insurance. Even if these longer-dated loans aren't very risky, banks like to buy insurance for them because the regulator deems the mortgages risk-free this way.
RBC reported earnings Wednesday, and on a conference call Jennifer Tory, head of personal and commercial banking, said it is getting harder to make money off mortgages. "We've seen continuing pressure on our margins," she explained, adding this is one of the reasons the bank decided to significantly boost the rate on its five-year fixed mortgages.
**This story has been updated to reflect TD's two fixed-year mortgage rate increases in November, first to 2.69 per cent and then to 2.84 per cent.