Higher bond yields trigger hike in mortgage rates
The recent increase in mortgage rates by several of Canada’s big banks is likely the start of a slow upward trend, experts say.
Scotiabank, the Royal Bank of Canada, and TD Canada Trust raised rates this week on some mortgages for terms ranging from two to 10 years.
On Friday, the Bank of Montreal said it is hiking the rate for its three-year mortgage by 0.1 of a percentage point to 3.75 per cent. Its new five-year rate is 3.39 per cent, an increase of 0.2 of a point. The new rates take effect on Saturday.
The increases are small — just one-tenth to three-tenths of a percentage point — but economists and industry experts say these may be definitive signs of rates returning to historically normal levels.
“When something is on sale, whether it’s pastrami or mortgages, you buy it. But the fact is you must be prepared for prices to go back to normal,” said Michael Gregory, senior economist at the Bank of Montreal’s BMO Capital Markets.
“Keep in mind that when you refinance a loan, whether it’s a car loan or a mortgage, you may be paying higher interest rates than you are now. Be prepared for normal.”
Federal Reserve Board chairman Ben Bernanke said Wednesday that the U.S. central bank will begin slowing the pace of its bond-buying stimulus program, now worth about $85 billion (U.S.) per month, later this year because the economy is gaining momentum.
As a result of his remarks, stock markets turned sharply lower on Thursday, and yields on government bonds surged.
“The Fed knew that the moment they started to talk more openly and clearly about stopping their purchases, the market was going to puke. That’s a technical term,” Gregory said.
The yield on Government of Canada five-year bonds, the benchmark for five-year mortgage rates, was 1.7 per cent on Friday. On May 2, the yield stood at 1.15 per cent, according to data on the Bank of Canada website.
“Yields have gone up 50 per cent. It’s been a huge jump,” said Kelvin Mangaroo, founder of RateSupermarket.ca
At Scotiabank, the rate on a two-year mortgage with a closed fixed term is 2.79 per cent, effective Saturday. That’s an increase of 0.1 per cent. RBC’s five-year is going up by 0.2 of a percentage point to 3.39 per cent on Monday.
Mortgage brokers in Ontario are still offering rates as low as 2.88 per cent on mortgages with five-year terms, Mangaroo said.
“We have seen a lot of movement in the past month or so. Even though rates are going up, they’re still attractive compared to historical levels,” he said.
Bernanke also said that even after the quantitative easing program stops in mid-2014, interest rates are likely to change until 2015. Most economists believe the Bank of Canada will not increase its benchmark overnight rate until 2014.
“There’s a general sense that the era of low yields is over,” Gregory said.
“I believe we’re in an upward trend in yield. Will we get an increase of 30 basis points every two days? No,” he said. “These things move in fits and starts. Our sentiment is we will get a grinding gain, two steps forward and one step back.” Madhavi Acharya-Tom Yew, The Toronto Star