Rising Mortgage Rates with the Big Banks and What It Means To You
Four of Canada’s Big Six banks have now raised their posted mortgage rates. TD started off this round of rate increases two weeks ago by raising its various mortgage terms, including an astounding 45-bps increase to its 5-year fixed rate, which jumped from 5.14% to 5.59%. RBC, National Bank of Canada and CIBC have since followed suit, raising rates by 10–30 bps. This rise in rates is partially related to Canadian bond yields, which rose to a seven-year high of 2.19% last week and are now hovering around 2.14%. This has driven up mortgage borrowing costs for the banks.
When it comes to the rate you will be paying, it will have little to no effect in qualifying on majority of the new homebuyers.
While new homebuyers are most likely able to secure a comparatively competitive mortgage rate, the challenge that will arise will be the stress test. The stress test uses the qualifying rate, this is into turn based on the mode average of the big six banks’ 5 year posted rates (currently 5.14%). The mortgage payments will go up, since the rates have gone up.
Current homeowners could feel the effects of the rate in two ways: a more difficult stress test to pass if they should want to switch lenders at renewal time; and higher penalties should they want to pay out their fixed mortgage early.
Here is an example: let’s say a big bank lends you $300,000 today at a five-year fixed rate of 3.59% with a 25-year amortization. If you break that mortgage in three years’ time, and if rates have not changed, the bank’s latest hike in their posted rate increases the penalty they will charge you from $10,228 to $12,715 (using some slight rounding). For comparison, a host of other non-Big Six lenders would charge you a penalty of $2,480 under the exact same circumstances.
So, what can you do in the face of rising mortgage rates?
Those that have a mortgage that is coming up for renewal and that aren’t happy with the rate they have been offered by a current lender are best to be well served by the expertise of a mortgage broker. A broker can help compare the savings of breaking a mortgage early and locking in a better rate somewhere else or help negotiate a better renew rate.