{"id":535,"date":"2016-01-08T08:55:00","date_gmt":"2016-01-08T16:55:00","guid":{"rendered":"http:\/\/www.roryc.ca\/blog\/?p=535"},"modified":"2016-01-07T12:58:58","modified_gmt":"2016-01-07T20:58:58","slug":"why-homeowners-buyers-can-expect-more-mortgage-rate-hikes-from-the-big-banks","status":"publish","type":"post","link":"https:\/\/www.roryc.ca\/blog\/2016\/01\/why-homeowners-buyers-can-expect-more-mortgage-rate-hikes-from-the-big-banks\/","title":{"rendered":"Why Homeowners &#038; Buyers Can Expect More Mortgage Rate Hikes from the Big Banks"},"content":{"rendered":"<p style=\"text-align: justify;\">Falling government-bond yields are usually good for homeowners in Canada because mortgage rates tend to follow suit. Not this time.<\/p>\n<p style=\"text-align: justify;\">Three of Canada\u2019s biggest lenders have raised mortgage rates and more increases are expected as new regulations, a weak economy and higher costs prevent banks from capitalizing on lower borrowing rates in the debt market where they finance their mortgages.<\/p>\n<p style=\"text-align: justify;\">\u201cWhen you look at the funding picture, it\u2019s getting more expensive for the banks,\u201d Meny Grauman, a financial analyst at Cormark Securities in Toronto, said by phone Wednesday. \u201cWe\u2019ve started to see cracks in credit and we know that\u2019s probably going to continue to intensify. If it continues, the same logic that caused the banks to raise will continue to apply.\u201d<\/p>\n<p style=\"text-align: justify;\">The higher mortgage rates add to measures by the federal government and the national housing agency to cool the housing market, which the Bank of Canada has identified as one of the major risks to the economy. Housing prices in Vancouver and Toronto have almost doubled in the past decade, raising concern that a market crash could lead to a rash of loan defaults.<\/p>\n<p style=\"text-align: justify;\">Even as speculation mounts the Bank of Canada could return interest rates to a record low this year, homeowners face higher mortgage costs as the banks look to protect their bottom lines in a deteriorating economy. This week, Royal Bank of Canada became the latest lender to raise its mortgage rates, following Toronto-Dominion Bank and Bank of Nova Scotia.<\/p>\n<p style=\"text-align: justify;\"><strong>Rate Cut<\/strong><\/p>\n<p style=\"text-align: justify;\">Yields on five-year benchmark government bonds, the part of the market where banks usually fund their mortgage lending, touched the lowest since August on Wednesday as new signs of slowing growth in China pushed the price of crude oil below US$35 per barrel. That led derivatives traders to assign a more than 50% chance the Bank of Canada will cut the benchmark interest rate to its record low of 0.25% by mid-year.<\/p>\n<p style=\"text-align: justify;\">The only other time Canada\u2019s benchmark interest rates were that low was 2009, and it kicked off a housing boom fueled by rising oil prices and cheap mortgage rates. This time around, bond yields are falling because the economic trouble is hitting much closer to home, with a deteriorating outlook for exports along with an inflated housing market.<\/p>\n<p style=\"text-align: justify;\">The banks are feeling the pinch with higher borrowing costs as pressures on the economy make them look less credit-worthy. Investors now demand about 129 extra basis points of yield to hold five-year bonds from top-rated Canadian banks compared with government benchmark notes, the biggest premium tracked by Bloomberg data since 2010. That premium was 51 basis points at the end of 2009.<\/p>\n<p style=\"text-align: justify;\"><strong>Paying Up<\/strong><\/p>\n<p style=\"text-align: justify;\">\u201cGiven the Canadian banks are a play on the Canadian economy, a slowdown in the economy can\u2019t really be seen as positive for the banks,\u201d Kris Somers, a Canadian debt analyst at Bank of Montreal, said by phone from Toronto. \u201cBanks are paying more money for debt than they have in the past.\u201d<\/p>\n<p style=\"text-align: justify;\">In addition to the higher borrowing costs generally, new government rules are also imposing higher costs on mortgage lending. Canada Mortgage &amp; Housing Corp. increased the fees it charges banks to securitize mortgage debt and the Department of Finance increased the minimum down payment requirement for insured mortgages. The Office of the Superintendent of Financial Institutions, the bank regulator, also proposed higher capital buffers to back the loans. Canadian lenders hold 75% of the country\u2019s mortgages.<\/p>\n<p style=\"text-align: justify;\"><strong>Margin Buffer<\/strong><\/p>\n<p style=\"text-align: justify;\">With the bank increases, the rate on a five-year fixed mortgage at Royal Bank rises to 3.04% on Jan. 8, from 2.94%. The five-year variable rate, tied to the bank\u2019s prime rate, rises to 2.6% from 2.45%. Toronto-based Royal is the country\u2019s No. 2 bank by assets.<\/p>\n<p style=\"text-align: justify;\">The government announcements were made to cool a housing market that\u2019s been on a tear, with housing prices nationwide rallying 27% in the last five years, according to the Canadian Real Estate Association. Vancouver and Toronto have outpaced other cities, prompting concern from the Bank of Canada and Fitch Ratings Inc., among others. Home sales flew to a record in Toronto and Vancouver in 2015 and prices continued their climb. The average price rallied 9.5% to $609,110 in December in Toronto and jumped 19% to $760,900 in Vancouver, according to those cities\u2019 real estate boards.<\/p>\n<p style=\"text-align: justify;\">The trend of banks maintaining a margin buffer even with lower costs in the public debt market started last year, when the Bank of Canada cut its overnight lending rate and the banks didn\u2019t pass the full savings onto consumers through their prime lending rate. The prime rate is used to price everything from variable mortgage rates to lines of credit. The same thought process prevails this year, Grauman said, as banks try to eke out profit in a tough economic environment.<\/p>\n<p style=\"text-align: justify;\">\u201c\u2018Flat\u2019 is the new \u2018up,&#8217;\u201d Grauman said. \u201cYou\u2019re just trying to hold the line on your margin.\u201d<\/p>\n<p><a href=\"http:\/\/business.financialpost.com\/news\/economy\/why-homeowners-and-buyers-can-expect-more-mortgage-rate-hikes-from-the-big-banks\" target=\"_blank\">Why Homeowners &amp; Buyers Can Expect More Mortgage Rate Hikes from the Big Banks<\/a> by Katia Dmitrieva &amp; Ari Altstedter | Bloomberg News | Financial Post<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Falling government-bond yields are usually good for homeowners in Canada because mortgage rates tend to follow suit. Not this time. Three of Canada\u2019s biggest lenders have raised mortgage rates and &hellip; [<a href=\"https:\/\/www.roryc.ca\/blog\/2016\/01\/why-homeowners-buyers-can-expect-more-mortgage-rate-hikes-from-the-big-banks\/\">read more<\/a>]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[],"class_list":["post-535","post","type-post","status-publish","format-standard","hentry","category-mortgage"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Why Homeowners &amp; Buyers Can Expect More Mortgage Rate Hikes from the Big Banks &#8226; Rory C Real Estate | Oakwyn Realty<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.roryc.ca\/blog\/2016\/01\/why-homeowners-buyers-can-expect-more-mortgage-rate-hikes-from-the-big-banks\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Why Homeowners &amp; Buyers Can Expect More Mortgage Rate Hikes from the Big Banks &#8226; Rory C Real Estate | Oakwyn Realty\" \/>\n<meta name=\"twitter:description\" content=\"Falling government-bond yields are usually good for homeowners in Canada because mortgage rates tend to follow suit. 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