Are the big banks increasing their rates?

Nov 17, 2016

With the rule change Oct 17th 2016, many advisors claim the rules could allow the big 6 banks leverage to increase their rates; but how soon?….

The Royal Bank of Canada has raised some of its mortgage rates, and the changes are going to make paying down the mortgage even more expensive for people who choose to take longer than 25 years to do so.

Royal announced the changes in a news release early Tuesday.

Starting Thursday, for a three-year fixed rate mortgage at the bank, borrowers with amortizations of 25 years or less will pay 2.69 per cent —an increase of 25 basis points from what it used to be.

The four-year rate has jumped to 2.79 per cent, up 30 points, and the five-year is now 2.94 per cent — also up 30 points.

Rates for homeowners who want to take more than 25 years to pay down their mortgage have jumped by even more: The three-year rate is now 2.79, the four-year is 2.89 and the five-year is 3.04 per cent — increases of 35, 40 and 40 points, respectively.

For someone who owes $300,000 on a 25-year mortgage locked into a five-year term, under the old rules, they would have paid $1,364 per month. Under the new rules, their monthly payment jumps to $1,410 — an extra $46 every month. But over the entire life of the loan, that adds up to more than $13,600 in extra interest costs.

Other banks hiking too

Earlier this month, TD hiked its prime rate to 2.85 per cent in anticipation of new rule changes set to be implemented at the end of this month that will increase the cost of insuring mortgages, especially for alternative lenders.

Those changes will make it more expensive for non-bank lenders to securitize their loans for longer than 25 years. So Royal’s move Tuesday could be a play at leveraging their new-found competitive advantage.

Banks use a variety of funding sources to find the money to lend to people wanting to buy homes, but one of the main ones is on the bond market. Simply put, banks make money on the spread between how much they have to pay investors to borrow money, and what they then turn around and charge home buyers for mortgages.

When the bank’s costs increase, they often pass that along to consumers in the form of higher lending rates.

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“The market has really re-priced interest rates higher right across the yield curve, and some of those pressures have spilled over to Canada as well,” said BMO senior economist Sal Guatieri.

“We’re seeing our 10-year Government of Canada bond yield now up about 30 basis points compared with before the U.S. election. So that’s a pretty meaningful move in long-term rates over such a short period of time,” he said.

Royal Bank cited higher financing costs in explaining its rates move.

“We consider a number of factors when making changes to mortgage rates, including our funding costs and market conditions,” said Mary Ellen Brown, a senior vice-president in Royal’s home equity financing division.

“Based on current conditions, our rates reflect the right balance between our clients’ expectations and our costs of funding mortgages.”

James Laird, co-founder of RateHub, said mortgage rates are still relatively low, even with the the latest hikes by TD and RBC.

“Five-year fixed rates below three per cent, historically speaking, are still abnormally low,” he said. “I do expect that as we move forward and more [mortgage] rules come into place that rates will continue to rise.”

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