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Royal Bank, Bank of Nova Scotia hike costs of five-year mortgage rates; rival institutions weigh options
Tara Perkins – Globe and Mail
Royal Bank of Canada raised mortgage rates for the second time in two weeks, setting the stage for another wave of hikes by major banks as they grapple with higher financing costs.
“This is just the beginning,” said Canadian Imperial Bank of Commerce economist Benjamin Tal. “There is no reason to believe that this will stop at this point.” Indeed, by late Tuesday Bank of Nova Scotia had already followed suit, matching RBC’s 25 basis point hike on fixed-rate mortgages. Bankers at rival institutions were weighing their options.
RBC kicked off the increases in March when it increased the price of fixed-rate five-year mortgages by 0.60%age points to 5.85%; many rivals followed suit. Following Tuesday’s move, RBC and Scotiabank’s posted rates will be 6.10%.
Executives are balancing their desire for market share with their need to pad profit margins. For instance, most banks increased their rates two weeks ago after RBC did so. Bank of Montreal, which has lost market share in the mortgage market and wants to win it back, has been heavily promoting a special five-year rate for customers who sign up for mortgages with a term of 25 years or less. Other banks also have special rates.
But even BMO’s rates are poised to increase. Though the bank didn’t boost its five-year rate Tuesday, it will soon. “We wanted to give consumers an opportunity over the next few days to come in and get pre-approved and locked in at 3.95%,” said Jane Yuen, senior manager at BMO.
“Traditionally banks generally move in relative lockstep to changes,” said Craig Alexander, deputy chief economist at Toronto-Dominion Bank. “Having said that, there’s no guarantee that everyone will follow the leader.”
When one or more banks have a higher posted rate, they can adjust the rate that customers are actually paying in order to meet their market-share goals, he added.
As a result, most homeowners wind up paying a rate that’s discounted from the posted rate. The actual rate that a customer pays depends on a variety of factors including their financial situation, whether they use a mortgage broker, and how good they are at negotiating.
Peter Aceto, the chief executive of ING Direct Canada, said it was inevitable that mortgage rates would rise, but he expected the increase to be more gradual. “I would have thought it would have been a bit more gentle,” he said.
ING Direct has decided not to boost its rates again for now. Mr. Aceto noted that the bank, which makes use of the Internet rather than an expensive branch network to reach customers, has lower costs than the larger banks and can therefore afford to charge less.
However, he noted that the banks’ funding costs continue to rise. And he pointed out that the banks have “rate holds” that oblige them to hold on to rates for customers – ING Direct has a 120 day rate hold for instance. “It’s pretty likely in this environment that your funding costs are going to be higher in 90 days or 120 days,” he said. “RBC may have been thinking about that risk.”
Marcia Moffat, RBC’s head of home equity financing, said the bank increased rates again because its funding costs have risen further in the two weeks since it last raised rates.
Royal Bank is Canada’s biggest mortgage lender, with a portfolio of roughly $148.5-billion.
Many bankers said they have seen a large number of customers with variable-rate mortgages choosing to lock-in to fixed-term rates in the last two months.
Ms. Moffat suggested that could be wise. “Most times in history variable-rate mortgages have been more cost effective than fixed rate,” she said. “But there have been a couple of points in history where that hasn’t been the case, and where you would have been better off to have gone with fixed versus variable, and I would say that this could be one of those points in history.”
Funding costs for five-year mortgages are heavily influenced by the yields on five-year government bonds, which have been rising.
Bond yields, in turn, are being influenced in large part by the market’s growing expectation that the central bank will raise rates more quickly than previously believed.
While many experts are predicting that the Bank of Canada will increase rates by 75 basis points before the end of the year, the market seems to be adjusting beyond that, Mr. Tal noted. RBC’s five-year fixed mortgage rates have now gone up 85 basis points.