Big banks raise mortgage rates

Rising mortgage rates announced Monday signal the end of historically low home borrowing costs and present Canadian consumers with a dilemma: either stay flexible, hope for the best and ride out the next several months or lock in to long-term loans.

Rising mortgage rates announced Monday signal the end of historically low home borrowing costs and present Canadian consumers with a dilemma: either stay flexible, hope for the best and ride out the next several months or lock in to long-term loans.

Three big banks raised their mortgage rates by more than half a point, effective Tuesday, and most industry watchers expect that’s just the beginning of future small jumps that will hike the the cost of home ownership the rest of this year.

For consumers nervous about the changes, the security of five-year, or longer, fixed loans may be the best option, says one mortgage expert.

‘If that (rising rates) causes you discomfort then perhaps a fixed rate’s where you want to be and if a fixed rate is where you want to be,” said Robert McLister, a mortgage planner and editor of the Canadian Mortgage Trends website.

“If you’re closing in the next six months, I suggest people do that quickly.”

The changes affect closed mortgages with terms of three, four and five years at RBC Royal Bank (TSX:RY), Laurentian Bank (TSX:LB), and TD Canada Trust (TSX:TD). Rates for mid-term mortgages like these tend to reflect the banks’ borrowing costs on bond markets, where mortgage loans are financed.

Other banks are expected to follow suit.

The biggest increase announced Monday affects five-year mortgages. All three banks are hiking their posted rate by six-tenths of a per cent to 5.85 per cent from 5.25 per cent.

That means a homeowner taking on a mortgage of $250,000 at the new posted rate of 5.85 per cent over a 25-year amortization period would pay $1,577 per month. Prior to Tuesday’s hike, that mortgage would have cost $1489 a month, or $88 less.

Many people with decent credit history who are applying for mortgages can negotiate better than posted rates.

The Bank of Canada is expected to begin raising lending rates this summer as it moves to fight growing inflationary pressures in the economy. The bank has kept its key overnight rate at a historic low of 0.25 per cent for more than a year to help stimulate the economy.

The latest increases reflect real-time market interest rates, which usually signal future central bank rate jumps months in advance.

Looking ahead, potential homebuyers entering the market also must consider rising rates when they decide to bid on a house. Is it better to wait until rising rates have cleared out some potential bidders or will a flurry of buyers and sellers spooked by the prospect of higher mortgage costs affect the supply-demand balance?

Historically, staying short-term and flexible has been the best strategy over the long term. But banks advise that locking in at still-attractive longer-term rates of five years and more is always a good bet for many consumers who want to ease their risk and sleep at night.

If the current bank prime rate of 2.25 per cent rises by 2.5 percentage points — an average increase during a rate-rising cycle — a homeowner with a variable mortgage should expect to pay about 30 per cent more on the monthly mortgage, says McLister.

Generally, long-term fixed rates rise by about half of the variable rate, he said.

While the fixed versus variable decision is specific to each individual, McLister said if prime rates spike by more than 2.5 percentage point, odds are good homeowners will save money in a five-year fixed rate mortgage.

Potential homebuyers should get their pre-approval applications in fast and expect delays in pre-approvals due to increased application volumes, he said. And homeowners with mortgages up for renewal would also be wise to lock in rates as far in advance as possible.

McLister said it’s difficult to tell if bank prime rates will rise by 2.5 points, but he added the banks have begun a cycle of rate increases and rates in the near and medium term will continue to rise before falling again.

‘They came down in the most recent rate cutting cycle by 4.25 (percentage points), so going up about half of that is definitely achievable,” he said.

McLister added that most economists expect a half to one point increase in banks’ prime rates by the end of this year.

But using recent history as a guide, its not likely rates will rise much higher than 2.5 points.

‘When the rates go up three (percentage points) or so they don’t stay there and go in a flat line. They go up and they go down.”

CIBC (TSX:CM) chief economist Avery Shenfeld also said mortgage rates hikes are a trend consumers should expect to continue.

‘Once the Bank of Canada starts pushing up short-term interests rates, and even in anticipation of that, it tends to spill out across the rest of the curve.”

He predicts the Bank of Canada will gradually raise key lending rates this summer, resulting in an increase of 0.75 per cent to one per cent by the end of September.

That would raise the average prime rate at the banks from 2.25 per cent to three per cent, which could tack on three-quarters of a per cent to the rates of homeowners with floating mortgage rates, Shenfeld said.

‘Consumers are forewarned that when they look at borrowing today they have to factor in potentially higher costs,” he said.

‘Consumers have to be aware in taking on debt at historically low interest rates that down the road they will be higher and have to leave room for their ability to pay those higher rates.”

When the Bank of Canada lifts rates, part of its intention is to take the fire out of the most interest sensitive segments of the economy, including the housing market, which has seen a particularly strong recovery, Shenfeld said.

The hot housing market is being driven, in part, by an influx of consumers willing to pay a premium for home ownership before interest rates rise.

Shenfeld said the rate increase could help dampen the house price inflation seen over the past several months.

Gregory Klump, chief economist at the Canadian Real Estate Association, said even though mortgage rates are rising, they are still comparatively low.

‘Even with interest rates expected to rise over the second half of this year, it’s going to be a while before mortgage rates are basically neutral. Even with interest rates rising they’re still going to be stimulative, just not as much.”

‘We’re coming off emergency level rates, and clearly the emergency has passed.”

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

AstraZeneca vaccine is ready to be used at a homeless shelter in Romford, east London, Wednesday, Feb. 3, 2021. THE CANADIAN PRESS/AP-Frank Augstein
AstraZeneca-linked blood clot confirmed in Alberta

A case of an AstraZeneca-linked blood clot has been confirmed in Alberta,… Continue reading

The Red Deer Catholic Regional Schools Board of Trustees selected the name St. Lorenzo Ruiz Middle School to be built in the north end of Red Deer. (Photo Courtesy of  Red Deer Catholic Regional Schools)
Red Deer Catholic Regional Schools raises about $8,720 for Terry Fox Foundation

Red Deer Catholic Regional Schools raised about $8,720 for the Terry Fox… Continue reading

A nurse gets a swab ready at a temporary COVID-19 test clinic in Montreal, on Friday, May 15, 2020. Health Canada has reversed course on home test kits for COVID-19, saying it will now review applications for such devices. THE CANADIAN PRESS/Paul Chiasson
Alberta declines Ontario’s request to send health-care workers

Alberta is “not in a position” to send health-care workers out of… Continue reading

The Red Deer Rebels allowed four straight goals from the Medicine Hat Tigers Friday night on the road. (Photo by Rob Wallator/ Red Deer Rebels)
Tigers hand Red Deer Rebels 10th straight loss

Tigers 4 Rebels 2 Through 17 games in the shortened WHL season,… Continue reading

Meghan Huizing has been selected by Red Deer Catholic Regional Schools as a finalist for the Alberta School Boards Association (ASBA) 2021 Edwin Parr Award. (Photo courtesy of Red Deer Regional Catholic Schools)
Red Deer Catholic names finalist for Edwin Parr Award

Meghan Huizing from St. Gregory the Great Catholic School in Blackfalds has… Continue reading

Red Deer Public Schools will not pilot the new draft curriculum at its elementary schools. (File photo contributed by Red Deer Public Schools)
UPDATED: Red Deer Public Schools says no to piloting new curriculum

Alberta Teachers’ Association support school boards

Brad Dahr, 53, is facing numerous charges. (Photo contributed by Alberta RCMP)
Alberta man charged for alleged sexual offences against children

An Edmonton man has been charged for alleged sexual offences against children… Continue reading

A person walks past a COVID-19 mural designed by artist Emily May Rose on a rainy day during the COVID-19 pandemic in Toronto on Monday, April 12, 2021. Employment lawyers say flouting COVID-19 public health orders when off the job or coming into work while knowingly sick could warrant discipline in the workplace. THE CANADIAN PRESS/Nathan Denette
Risky pandemic behaviour off the clock could mean workplace discipline: lawyers

CALGARY — Employment lawyers say flouting COVID-19 public health orders when off… Continue reading

Vials containing Russia's Sputnik V vaccine for COVID-19 are seen at the San Marino State Hospital, in San Marino, Friday, April 9, 2021.  THE CANADIAN PRESS/AP-Antonio Calanni
China, Russia using their COVID-19 vaccines to gain political influence

OTTAWA — China and Russia have been using their locally produced COVID-19… Continue reading

Prime Minister Justin Trudeau holds a press conference in Ottawa Tuesday, March 9, 2021. THE CANADIAN PRESS/Sean Kilpatrick
Trudeau announces donation to Duke of Edinburgh’s award ahead of funeral

Canada will donate $200,000 to the Duke of Edinburgh’s International Award as… Continue reading

Parliamentary Secretary to Minister of Innovation, Science and Industry (Science) Will Amos responds to a question during question period in the House of Commons on Parliament Hill in Ottawa on Friday, Dec. 11, 2020. The Liberal MP who inadvertently flashed his parliamentary colleagues says the fact that a screenshot of him in the nude was leaked to the media sends a troubling message about the corrosive state of politics in Canada. THE CANADIAN PRESS/ Patrick Doyle
Canada’s naked MP speaks out: leaked photo sends message ‘anything goes’ in politics

OTTAWA — The Liberal MP who inadvertently flashed his parliamentary colleagues says… Continue reading

In this file photo, a lotto Max ticket is shown in Toronto on Monday Feb. 26, 2018. (By THE CANADIAN PRESS)
No winning ticket for Friday night’s $10 million Lotto Max jackpot

TORONTO — No winning ticket was sold for the $10 million jackpot… Continue reading

Opinion
Opinion: Canada’s self-esteem needs Trump

Well, it was fun while it lasted. For four years, with Donald… Continue reading

Harley Hay
Harley Hay: Shenanigans on the links

It must be something about my Scottish heritage but I seem to… Continue reading

Most Read