Just before the start of a warm, sunny Spring weekend the big banks snuck in a mortgage rate increase of 45 basis points and 20 basis. The two big banks that acted? TD bank and RBC. Two of largest banks in Canada. Now some might think that it’s conspiracy because with warmer Spring temperatures come more open houses. Everyone knows Spring is the ideal time to buy a home in Canada, but are the banks just trying to make a bigger buck off homeowners?
Before we jump to conclusions too quickly, let’s review what mortgage rates went up. The increases to mortgage rates were put on the posted rates of a standard 5-year fixed rate mortgage. This is the benchmark rate that is used to determine if a home buyer would qualify. The increases essentially took the rate up to 5.59% at TD and 5.34% at RBC.
These rates now represent roughly $615/month in mortgage payments per $100,000. Much higher than the $500/month payment per $100,000 borrowed. The rate increase is essentially decreasing the amount of purchasing power a potential home buyer may have. Not what home buyers and realtors want to hear.
Increasing Bond Rates
To understand why fixed rate mortgages are going up, one has to look at what’s happening with the 10 year US treasury bond from last week. For the first time in 4 years, the yield on the bond rose past 3%. That means that for an investor, she can pretty much guarantee herself a 3% annual interest by buying and holding the bond.
Since government bonds are the least riskiest types of bonds, this is driving up the cost of borrowing for banks all around. Why would an investor buy a bank bond for anything less than 3% interest when the government is willing to pay that much?
For that reason, the cost of financing mortgages for banks everywhere is starting to increase. This is happening without the action of the Federal Reserve or the Bank of Canada. The cost of money is rising totally due to market forces.
The key thing to remember is that long term fixed rate mortgages (5 years and above) are directly correlated to the market price of bonds NOT the Bank of Canada interest rate. This is very important to remember because long term fixed rate mortgages can be impacted market forces.
Variable Rates Are Safe… For Now
Variables rates at the big banks didn’t move that much since they are most affected by rate increases by the Bank of Canada. The fact that the bank of Canada stayed put in their last meeting means that variable rate increases are safe… for now. This doesn’t mean that we’ve seen the last of the rate increases for variable rates. With the US looking to increase rates at least a couple more times this year, there is a certainty that Canada will follow.
What this means for the time being is that the spread between a variable rate and fixed rate is larger. For those looking for a short term mortgage, it’s still possible to get a really good interest rate. However, this shouldn’t be the factor that determines whether a house is affordable. Using short term variable rates just to qualify for a mortgage could end up in disaster if rates rise and payments can’t be made.
Rising rates should mean that we should all be reviewing our debt and making sure that we can make the necessary payments. Even though interest rates are low shouldn’t mean we should be gorging ourselves on debt. This remains true for home owners. It’s great when interest rates are down and house prices are rising, but the opposite is true now. Rates and rising and home prices are falling or have become stagnant.
Now is not the time to take out more money from the equity in the house. Now should be the time to show constraint and really start paying off the loans before interest rates start hitting the 4-5% range for short term loans. Remember that debt can be addictive and it may all seem so innocent until that one day where you are unable to repay it back.