RBC hikes some fixed mortgage rates as bond yields spike

Original Author: Tim Kiladze

Source: http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/rbc-hikes-some-fixed-mortgage-rates-as-bond-yields-spike/article32847841/

Increases to mortgage rates come as no surprise, make sure you have revised your budgets and planning for 2017.



Tuesday, November 15th, 2016 | ACCOUNTING ECONOMY REAL ESTATE


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Under pricing pressure from spiking bond yields and Ottawa’s housing market crackdown, Royal Bank of Canada is boosting its most important fixed-rate mortgages.

RBC is also introducing a new pricing structure, charging different rates for mortgages with amortization periods of 25 years or less and for those with longer maturities — a first for Canada.

Starting November 17, a new RBC five-year mortgage with an amortization period of 25 years or less will cost 2.94 per cent, up from 2.64 per cent, an 11 per cent jump. The bank also increased its three-year and four-year rates for these mortgages to 2.69 per cent and 2.79 per cent, respectively.

For mortgages with amortization periods longer than 25 years, the rates climb even more quickly. The annual cost of a five-year mortgage of this length will rise 40 basis points – a basis point is 1/100th of a percentage point – to 3.04 per cent.

The increases come as Canada’s banks grapple with the federal government’s crackdown on a frothy housing market. In October, Finance Minister Bill Morneau announced higher qualifying rates for mortgages with down payments of less than 20 per cent, as well as restrictions on the types of mortgages that can be covered by government-backed portfolio insurance.

The latter change is likely to have fostered the new rates for different amortization lengths. Mortgages that take more than 25 years to pay back no longer qualify for bulk mortgage insurance. Even if these longer-dated loans aren’t very risky, banks like to buy insurance for them, because it absolves them of having to hold any capital against the loans. The regulator deems them risk-free this way.

Canada’s banking watchdog, the Office of the Superintendent of Financial Institutions, has also imposed new rules that will require lenders to hold more capital against riskier mortgages. Combined with the other changes, financial institutions suddenly find it more expensive to lend against housing.

As the banks wrestle with these rules, bond yields have also started spiking. Since Donald Trump was elected president of the United States last Tuesday, the five-year Government of Canada bond yield, which is used as a benchmark for mortgages, jumped 21 basis points to 0.96 per cent.

The sudden spike affects banks because their mortgages earn a spread off of the five-year benchmark rate. Whenever their borrowing costs rise, they pass the increase along to customers who take out new loans.

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