Mortgage rates inch higher from record summer lows

Canadian mortgage rates have bounced up from their record lows of this summer in anticipation of an improving economy prompting central banks to do the same.

Five-year, fixed-rate mortgages have inched up between 10 and 15 basis points since the summer, Penelope Graham, editor at RateSupermarket.ca said in an interview. A basis point is 1/100th of a percentage point, so a 10-point hike is the equivalent of a mortgage rate going from 2.55 per cent to 2.65.

That would move the payment on a 25-year mortgage for $400,000 from $1,800 a month to $1,820 — not a large number in absolute terms but a psychological shock to mortgage holders who had perhaps gotten used to cheaper and cheaper borrowing for the last half-decade.

Fixed-rate mortgages, especially five-year ones, make up the lion's share of Canada's mortgage market, and their rates are intrinsically tied to activity in the bond market, because borrowing there is where banks generally come up with the money to loan to mortgage applicants who want to buy a home.

Bond yields rising

The cost of borrowing is going up everywhere. A five-year Government of Canada bond was paying out 0.6 per cent as recently as August. Today it's up by more than half, to 0.92 per cent — still low, but a factor in the quiet upward creep of mortgage rates.

Variable rate mortgages are closely tied to the central bank's rates, but the larger pool of fixed-rate mortgages are priced based on what's happening in the bond market because that's where banks finance their loans.

Banks make money on the spread between what they have to pay out on bonds they sell, and what they can get in return for loaning that money to home buyers. That spread has been thinning as the bond market reacts to a widely held belief that the U.S. central bank is getting ready to hike its benchmark interest rate for the first time in almost a decade.

Bond yields are rising in anticipation of that, and "when bond yields go up, so do fixed mortgage rates because lenders have to absorb those costs," Graham said.

When asked for comment, none of the five big Canadian banks provided details as to whether or not they had hiked their five-year rate recently, but a spokesperson with TD Bank said "we review our rates on an ongoing basis so that that we're providing competitive options to meet the needs of our customers."

• Bank of Canada cut unlikely to move mortgages much
• Small rate hike could leave mortgage holders stretched, survey finds

"In making rate decisions,we take into account a number of factors," the spokesperson said, adding that the bank did recently hike its rate on a less-common four-year mortgage by 10 basis points.

Many alternative lenders still have rates well below three per cent, but the big banks' rates are more closely watched since they tend to dominate the industry.

Customers can often negotiate a better deal with the bank than their posted rate offers, but here's the posted five-year mortgage rate at each of Canada's biggest banks:

• Scotiabank — 4.49 per cent
• BMO — 4.64 per cent.
• TD — 4.64 per cent.
• Royal Bank — 4.74 per cent.
• CIBC — 4.79 per cent.

Fixed rate loans aren't the only ones inching higher, though. The Bank of Canada has cut its benchmark interest rate twice this year, and each time, lenders ratcheted their variable rates lower. The central bank is showing no signs of raising its benchmark rate, yet variable mortgage rates have inched up by 10 to 20 basis points from where it was in the summer.

• TD, BMO lower rates to match central bank's cut

Why? Toronto mortgage broker Marcus Tzaferis at Morcan Direct said the banks cut rates earlier in the selling season to stay competitive, but now they don't have to.

"At the end of each year when lenders hit their caps you see rates inch up," he said, explaining a seasonal reason why variable rates tend to inch up in the winter when sales are soft. It's just more pronounced this year as major lenders have decided to draw a bigger line in the sand.

"It's 100 per cent profit," he said, adding that he saw discounts as much as 85 points below prime earlier this year, but that discount has now dropped to about 50 points.

Tzaferis said he wouldn't be surprised to see rates drop again in the busy spring buying season, and for her part Graham said any change in mortgage rates is likely to be gradual as policymakers and the lenders themselves will be eager to mitigate any resulting shock.

"Nobody has a crystal ball but if the economy improves, higher rates will accompany that some time in the future," she said.

"It's important to be savvy [now] you've got options," she said.