Canada’s major banks have begun to increase rates, putting an end to near-historical lows across the country. News broke on Monday that several banks would be increasing their rates by 6/10ths of a percentage point, signifying a shift in the real estate market.
The largest increase was attached to the popular five-year fixed closed rate. The posted rates at Royal Bank, Laurentian Bank and TD Canada all went up from 5.25 percent to 5.85 percent. Of course, posted rates are routinely discounted. As such, RBC’s new discounted rate for the five-year term also increased 6/10ths of a percentage point to 4.59 percent. TD discount mortgage rates now sit at 4.55 percent, while the discounted rate at Laurentian is holding steady at 4.54 percent.
All three of the above banks also raised their four-year rate by 4/10ths of a percentage point, causing it to land at 5.34 percent. No surprisingly, mortgage brokers anticipate that the other big banks will follow suit shortly.
A Change in the Tide
These recent hikes follow a release from the Canadian Association of Accredited Mortgage Professionals annual spring report that shows Canadians have been taking advantage of record-low interest rates by locking in long-term mortgages. According to recent data, of the 3.8 million Canadians with a fixed mortgage, 14 percent chose to lock their mortgage down during the last year while rates were low.
The survey also found that mortgage holders are accelerating their payments in order to pay down their loans faster. Nearly 23 percent of respondents said they were voluntarily increasing their payments, while 19% percent were making lump sum payments. Roughly 10% were doing both.
What Impact Will Increases Have?
If you failed to lock in a low mortgage rate prior to hikes, prepare for some pain in your wallet. Just last week, a $200,000 mortgage amortized over 25 years cost just $1,051 a month at a rate of 3.99 percent. With the hike to 4.59 percent, that monthly payment jumps up $66 to $1,117.
How Will This Impact Indebted Canadians
Cheap borrowing costs have made it easier for Canadians to enter the real estate market, but what happens now that rates are on the rise? According to financial experts at Canada Mortgage and Housing Corporation, affordable housing should cost less than 30 percent of gross household income. These costs include mortgage payments, property taxes, condo fees and utility costs. For most Canadians, even a moderate increase could cause housing costs to balloon to as much as 43 percent, resulting in insurmountable expenses.
What About Variable Rates?
Variable mortgage rates have not been affected by Monday’s announcement (variable mortgage rates rise in tandem with the Bank of Canada’s overnight rate – this remains unchanged). But this could change soon. According to Bank of Canada governor, Mark Carney, inflation rates are higher than expected. This could mean that the central bank will raise key lending rates sooner than expect. The key rate has been at a rock-bottom 0.25 percent since April 2009.