In terms of mortgage rates, banks tend to follow suit with their counterparts who raise or lower their rates. When CIBC and Toronto-Dominion raised their fixed rate by 10 to 15 basis points on January 12. As a result, they only imitated the Royal Bank. The day before, it had raised by 15 basis points its fixed rate over 5 years, which went from 4.99% to 5.14%. The same applies to the 5-year fixed mortgage (25-year amortization), the rate of which went from 3.39% to 3.54%. http://www.mp3ar.com/stop-debt-a-single-step-at-a-time/ for clarification
The next day, Toronto-Dominion matched its competitor’s offer, while CIBC also raised rates by 10 to 15 basis points. Nevertheless, the offer of this bank remains cheaper than that of TD or the Royal.
The other big banks are thinking.
Scotia is flooring its mortgage rate issue. She should make a similar decision in the very near future. Ditto for the National Bank, which is still evaluating the situation. On the other hand, we do not know anything about the Bank of Montreal’s intentions. Overall, one can expect a bulk increase in mortgage rates offered by Canadian credit institutions.
Consequences on the Canadian real estate market
If, as we can anticipate, the majority of banks decide to raise their rates, this upward movement will increase the reference rate that is taken into account to simulate crises, according to Gregory Klump. So having an impact on mortgage eligibility, even if it should be “marginal”, according to Klump.
As a reminder, the Bank of Canada sets a mortgage reference rate based on the market average. Homebuyers who have made a down payment of at least 20% are not required to insure their mortgage. However, they must prove that they have the financial resources to be able to repay their monthly payments in the event of a rate increase of 2%.
For example, the benchmark rate set by the Bank of Canada is currently 4.99%. Candidate buyers must therefore prove that they can repay monthly payments based on a mortgage rate of 6.99%.
The consequences should be felt primarily in large cities where the real estate market is expensive, such as Vancouver.
Increased cost of funds on wholesale markets
Following the rise in bond rates, banks have to deal with the rising cost of funds on the wholesale markets. Hence the need to increase their mortgage rates to maintain their profit margins.
In addition, experts expect the Bank of Canada to raise again its key rate this week, which would then go to 1.25%. This decision, if adopted, should have a mechanical impact on the preferential rates of major credit institutions, as well as increase the cost of variable rate loans.