Homebuying

Canada’s big banks just raised their mortgage rates to the highest level in four years

By: Jessica Mach on January 12, 2018

Update: This article was updated on Jan. 15 to reflect that CIBC also raised its mortgage rate.

Canada’s big banks are raising their mortgage rates.

The Royal Bank of Canada and the Toronto-Dominion Bank are the first banks to make a move; this week, they announced their five-year special rates for a five-year fixed mortgage will go up by 15 basis points, from 3.39% to 3.54%. The qualification rate — the rate at which some homebuyers need to show they qualify for — will jump from 4.99% to 5.14%.

Meanwhile, CIBC's rate for a five-year fixed mortgage only rose to 4.99%, up ten basis points from 4.89%. 

Scotiabank has also confirmed to LowestRates.ca that it will likely hike mortgage rates as well, and is set to make an announcement soon. Expect Canada’s other major banks — National Bank and BMO — to follow very shortly.

Qualifying rates haven’t been this high since 2014.

At 5.14%, a Canadian buying a property for $500,000, with 10% down and 25 years amortization, will have to show they can afford to service a monthly mortgage payment of $2,745. Let’s say the property is a condo — suddenly you’re adding on $450 for maintenance fees and another $120 a month for property taxes. The bank is going to want to make sure you can afford your $3,315 monthly payment.

All signs currently point to the Bank of Canada raising interest rates at its next rate announcement on Jan. 17. Economists predict there could be as many as three hikes this year. The bank’s benchmark rate sets the standard for how much interest banks charge on their loans.

As the country’s central bank, the BoC periodically adjusts interest rates to make sure that inflation doesn’t get out of hand. When these adjustments happen, consumers are not directly affected; the consumer-facing banks that lend from the BoC, like RBC or Scotiabank, are.

These consumer-facing banks then move their own rates to make sure that they can still lend at a profit. So, hypothetically speaking, if the BoC raises its current rate of 1% to 2%, and consumer-facing banks were already lending to their customers at a 2% interest rate, these banks will likely hike their rates, too. (It’s not a two-way street, though: when the BoC lowers its rates, banks do not always follow suit.)

In combination with the OSFI stress test rules that kicked in on Jan. 1, higher mortgage rates could make home ownership outright impossible for many in expensive cities like Toronto and Vancouver.

The OSFI rules “stress test” prospective buyers at one of two rates (e.g., whichever ends up being higher): their bank’s five-year average posted rate; or two percentage points higher than the rate they were offered by their bank or broker.

With higher mortgage rates, not only will houses become more expensive to pay for in the long run. Getting access to a mortgage in the first place might also become harder than ever. 

 

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