Expect an increase of up to 25 basis points
Mortgage rates have been so low, for so long, that it almost feels like they’ll never rise. Even the Bank of Canada’s latest decision to keep overnight target rates at 0.5% is the equivalent of saying: We’re keeping with the status quo.
But according to media reports banks have quietly increased their own prime lending rate by 0.5%, thereby reducing the discount for new variable-rate mortgage amounts.
“It’s a bit overstated,” says RateSpy.com founder and independent mortgage broker, Robert McLister, but the fact remains: lenders have tightened the discount new borrowers can expect on variable-rate mortgages.
The most competitive lenders—typically those that work with independent mortgage brokers and specialize in mortgage lending—raised their rates by 0.15% to 0.25%, while some major banks increased their variable rates by as much as 0.25%.
How does that translate if you’re currently shopping for a mortgage? It means you can no longer find a 2.39% five-year variable rates, says Jake Abramowicz, an independent mortgage broker. Now, the new low is around 2.79%.
“There are two reasons why we’re seeing this small rate increase,” says Abramowicz. “In anticipation of the U.S. Fed raising rates in mid-December and because a lot of lenders have reached capacity and want to slow down their new mortgage business.”
McLister adds that other, unseen, factors are also prompting these small rate increases. “Canadian lenders are being hit with market risk premiums, higher deposit rates, more restrictive securitization rules and higher capital requirements.”
In fact, decisions made by the federal government in the last few years have created a more expensive environment for banks and mono-lenders to do business, says McLister. “Rising rates are a side effect of government policies designed to reduce financial system risk.”
What does it mean for the end-user: the home buyer? On a $360,000 mortgage, the newly increased rate would add $72 to a person’s monthly payments. On a $720,000 mortgage, payments would increase by $144 per month.
The basis point increase certainly adds to a person’s monthly mortgage payment, but fears of the mortgage market grinding to a halt are exaggerated, says Abramowicz. “I don’t think a 30 to 40 basis point increase in rates will cause a slowdown in the housing market.”
Also, the recent increase doesn’t mean that rates won’t fall again in the near future, says McLister. But absolute rock-bottom rates are over. “Policy changes [in the last few years] will keep rates higher for years to come,” says McLister.
And governmental policy tweaks aren’t over, yet. The feds are seriously considering creating a tiered minimum down payment system, which could see force buyers to save a minimum 7% to 10% down payment before buying a home valued over $500,000. The feds are also toying with the idea of implementing lender insurance deductibles—where banks would be forced to pay a deductible on any mortgage default insurance claim they make. At present the banks can make a claim and get fully reimbursed for the defaulted loan, but are not required to pay a fee.
by Romana King for MoneySense, December 7th, 2015