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Over this past week, we have seen an increase in fixed-term mortgage rates at many lenders.
Most banks, including the Royal Bank, TD Canada Trust and Scotiabank, have increased their five-year, fixed-term mortgage rates by up to 30 basis points with the highest being the Royal Bank to 2.94 per cent.
What is causing this increase in rates?
Fixed-term mortgage rates are primarily influenced by the yield on Canadian government bonds. The bond markets anticipate future rate rises, which is what we are seeing right now.
The bond markets are nervous as a result of Donald Trump being elected in the U.S. and his promise to cut taxes and spend $1 trillion to stimulate the economy.
Many are anticipating that it may force the Federal Reserve to raise interest rates.
This, combined with the new mortgage rule changes that come into effect at the end of month, which increases the cost of insuring mortgages for some non-bank lenders, might be causing banks to take advantage of their competitive position and raise rates.
Banks make money on the spread between what they pay investors to borrow money and what they charge for mortgages, but there are also other factors involved for the decision to raise mortgage interest rates.
Ten years ago, the posted rate for a five-year, fixed-term mortgage was approximately 6.50 per cent. Fifteen years ago it was close to seven per cent.
Even with discounted rates, the average interest rate for a five-year, fixed-term mortgage was five to six per cent.
We have obviously been seeing historically low interest rates over the last few years with predictions of interest rate increases beyond what we are seeing right now by the end of next year.
Below is an example of increased interest rates on an average mortgage of $320,000 on a five year term with a 25 year amortization for comparison purposes.
So is there a reason to panic?
Probably not.
If you have a five-year fixed term mortgage that doesn’t renew for a few years, this is most likely a non-issue right now.
If you want to hedge your bets in case you are facing higher interest rates come renewal time, increase your monthly payment amount by 20 per cent each year to offset any payment shock at renewal time for potentially higher interest rates.
This is a win regardless as you will be saving on your interest costs overall.
At this time, there are still some lower rates available from non-bank lenders, but it’s uncertain how long they will be available and these rates are not available for a rate hold, so you must be ready to move forward.
If you are looking to purchase a new home or your current mortgage is up for renewal or you are considering a refinance to access equity for investment purposes or to pay off higher interest debt, today is a good time to take action if you are hoping to secure that lower rate.
If you would like to discuss further please call me at 888-561-2679 or email me.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.
