Why banks are raising mortgage rates, and what it means

News that Royal Bank of Canada will begin raising mortgage rates on several products Friday, Jan. 8 will undoubtedly lead to some hand-wringing among Canadian homeowners and prospective homebuyers.

RBC’s move – announcing its special offer, two- to five-year fixed closed mortgage rates will rise by 0.10 per cent – may have surprised some consumers, given that the Bank of Canada continues to hold its influential overnight lending rate at 0.50 per cent.

But RBC’s decision – and don’t be surprised if other banks follow suit – is the latest in a series of changes to the mortgage industry that could cool the housing market. In December, the federal government announced it will increase the minimum down payment requirements, effective Feb. 15, 2016.

So, what are homeowners and buyers to make of all this, at a time when conditions in some markets are cooling – with Toronto and Vancouver being notable exceptions.

“People need to keep in mind that the Bank of Canada (which variable rate mortgages are primarily priced off) responds to measured changes in inflation, whereas the bond market (which fixed mortgage rates are primarily priced off) moves on expectations of inflation,” Toronto-based mortgage broker and wealth planner Calum Ross told YPNextHome. “What this means, in reality, is that by the time the Bank of Canada changes its rates, fixed mortgage rates adjusted long ago.”

The rate changes announced today are not a reflection of the bond market, as those are moving the other way (bond yields recently declined), Ross adds. “(RBC’s move) is a reflection of changes in other mortgage fulfillment costs.

“I will also point out that any mortgage expert doesn’t spend a lot of time watching the ‘smoke and mirrors’ game of bank-announced rates. When in comes to serving clients – it’s the real discounted rates for full featured mortgage products that matter. Published mortgage rates at big banks are not necessarily something to be worried about.”

All Greek to you? Most homebuyers don’t truly understand the intricacies of the complex mortgage landscape, which is why many consumers value the services of mortgage brokers such as Ross, who do. Brokers offer products from multiple lenders, as opposed to banks, which offer only the products of their own institution.

Canada Mortgage and Housing Corp.’s 2015 Mortgage Consumer Survey showed that market share held by brokers is growing notably, particularly among repeat homebuyers.


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