Mortgage Rates Canada: Tipsy Topsy?

Source: Hannif Highclass
Publish:MY BLOG: Toronto Real Estate: March 26, 2012

RBC Hikes Record-Low Rate, Signalling End Of Ultra-Cheap Mortgages

TORONTO — Royal Bank is raising its posted fixed and variable mortgage rates, of between 10 and 50 basis points in a sign the era of ultra low borrowing could be drawing to a close.

The Toronto-based lender said its posted five-year closed mortgage rates will move up 20 basis points to 5.44 per cent effective Mar. 29, while bank’s special fixed rate offer on a four-year fixed rate will add 50 basis points to 3.49.

Meanwhile, the posted five-year variable rate — which rises or falls along with the bank’s prime lending rate — will rise 10 basis points to prime plus 0.20 percentage points.

The prime rate, which usually moves with the Bank of Canada’s key interest rate, is currently three per cent.

The moves come after a recent race to the bottom that recently saw Royal and others push their special offer fixed rate down to 2.99 per cent.

Although variable rates usually follow the lead of the Bank of Canada, longer-term rates are more influenced by bonds. Higher bond yields increase the cost of funds for lenders, who in turn pass them on to customers.

Government of Canada five-year bond yields have jumped more than 50 basis points in the past three months alone.

The other banks could soon follow RBC’s move in raising rates as the big five Canadian banks often move in lockstep.

In a BMO report Friday, its economists argued that with the U.S. recovering gathering steam, central bankers on both sides of the border are becoming more comfortable with the economy and less so with historically low interest rates that in Canada are fanning the flames of the hot housing market.

Both Finance Minister Jim Flaherty and Bank of Governor Mark Carney have recently flagged household debt at a danger to the economy.

Household debt to disposable annual income is above 150 per cent.

Courtesy

What drives changes in 5-year fixed mortgage rates?

Canada Bond Yields:

By and large, the 5-year fixed mortgage rate follows the pattern of 5-year Canada Bond Yields, plus a spread. Bond yields are driven by economic factors such as unemployment, export and inflation.

Bank of Canada: Mortgage Rates vs. Bond Yields

 
When Canada Bond Yields rise, sourcing capital to fund mortgages becomes more costly for mortgage lenders and their profit is reduced unless they raise mortgage rates. The reverse is true when market conditions are good.

In terms of the spread between the mortgage rates and the bond yields, mortgage lenders set this based on their desired market share, competition, marketing strategy and general credit market conditions..

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