TD Bank (TSX:TD) has quietly increased its fixed mortgage rates ahead of a similar move by Royal Bank of Canada (TSX:RY) to take effect Thursday, the latest sign that Canada's big banks are hiking the costs of borrowing for homeowners.
Cheryl Ficker, a spokeswoman for TD, said Wednesday that the lender raised its special rate offer for a four-year fixed mortgage by five basis points to 2.44 per cent and for a five-year fixed mortgage by 10 basis points to 2.69 per cent. The changes kicked in Tuesday and affect all amortization periods, Ficker said.
Rob McLister, a mortgage broker at IntelliMortgage and founder of RateSpy.com, said he expects the other big banks will quickly move in lockstep because of a massive sell-off in the bond market that has made it more expensive for banks to get access to cash.
"When bond yields shoot up 25-plus basis points like we've seen in the last week, the big banks move like a herd," said McLister.
"Some lift rates within 48 to 72 hours and the stragglers take two to four more days. But the herd always moves in the same direction."
McLister said he expects the other big banks to boost their five-year fixed mortgage rates by 10 to 40 basis points.
TD's decision comes ahead of Royal Bank's hikes to its special offer for fixed mortgage interest rates.
As of Thursday, RBC's special offers for a four-year fixed rate mortgage will rise by 30 basis points to 2.79 per cent. A five-year fixed mortgage rate will be 2.94 per cent, an increase of 30 basis points.
The bank's changes are based on amortization periods of 25 years or less.
RBC homebuyers who opt for an amortization period longer than 25 years will have to pay higher rates than those with shorter amortization periods. The special offer rates for four- and five-year fixed rate mortgages are 10 basis points higher than for those with an amortization of 25 years or less.
McLister said the wide gap in the banks' new rates indicates that RBC is intentionally overpricing its competitors.
"I suspect RBC, acting as market leader, is displaying these extreme rates to create a perception that rates should be higher than they are," he said. "It also generates more revenue when RBC's variable-rate customers lock in."
SUDDEN RISE IN INTEREST RATES COULD CAUSE HOME PRICES TO DROP 30 PER CENT
TORONTO — A sudden rise in interest rates could cause house prices to plummet on average 30 per cent nationally, according to stress tests performed by Canada's federal housing agency released Thursday.
Canada Mortgage and Housing Corp. said it studied the impact of two interest rate hikes — a one percentage point increase over one quarter this year, followed by a 1.4 percentage point rise during one quarter next year.
CMHC said its mortgage insurance business would incur $1.13 billion in losses in such an event but that it could withstand the hit. A spokesman for the agency stressed that the scenario is an "extreme case" and would be unprecedented.
Interest rates have started to go up this week as a sell-off in the U.S. bond market has driven bond yields higher, making it more expensive for banks to access capital.
Two of Canada's biggest banks — TD Bank (TSX:TD) and Royal Bank (TSX:RY) — have hiked their fixed mortgage rates, anywhere from 0.05 percentage points to 0.4 percentage points.
There are concerns that as interest rates rise, some Canadian homeowners could encounter difficulty making their mortgage payments and face the risk of default.
"Households are so leveraged right now and house prices are at such incredibly high levels relative to household incomes," said David Madani, senior Canada economist at Capital Economics.
"Even a moderate doubling in interest rates — which sounds like a lot but we're talking about maybe 200 basis points (two percentage points) — could potentially pop the housing bubble."
The stress test conducted by CMHC was one of several extreme scenarios it examined over a time period from 2017-2021. They included a U.S.-style housing correction, a high-magnitude earthquake that destroys critical infrastructure in a major Canadian city and a drop in oil prices where they fall to US$20 per barrel next year and remain between US$20-30 for another four years.
Another scenario that the agency tested involved a "severe and prolonged" economic depression, which CMHC said would see house prices drop 25 per cent and unemployment rise to 13.5 per cent. The insurer said it would incur $3.12 billion in losses in that case.
CMHC said its capital holdings were sufficient to withstand all scenarios it tested. None of the scenarios should be considered a prediction or forecast, the agency added.
"Stress testing involves searching out extreme scenarios that have a very remote chance of happening and planning for them," Romy Bowers, CMHC's chief risk officer, said in a statement.
"Rigorous stress testing is an essential part of our risk management program and allows CMHC to evaluate its capital levels against these scenarios."
