Sunday, June 15, 2008

Mortgage rates rise

The cost of borrowing for a home is going up and, in some cases, by quite a bit.

Several of Canada's biggest banks are raising most of their mortgages, effective Friday, while hikes of up to 85 basis points have already kicked in.

TD Canada Trust (TSX: TD) hiked its residential mortgage rates today by up to 85 basis points, effective today, while Bank of Montreal (TSX: BMO) is hiking its residential mortgage rates by up to 85 basis points for some terms on Friday.

Not all Montreal mortgage rates at all banks are rising by such a jump, but virtually all of them – including Royal Bank (TSX: RY), National Bank (TSX: NA) and CIBC (TSX: CM) – are pushing through increases of at least 25 basis points to their posted rates.

That will add to homeowners' interest payments, with short-term mortgages becoming especially pricey.

For instance, a one-year open mortgage at Royal will rise by 50 basis points to 8.8 per cent, a one-year open at TD rises by 80 basis points to 9.1 per cent and CIBC's one-year open mortgage will cost 9.24 per cent.

In contrast, rates for five-year closed mortgages – the most popular in Canada because of the certainty it provides, especially to first-time buyers – is much lower. CIBC's posted rate for five-year Montreal mortgages was the lowest among the majors, at 6.95 per cent.

The commercial banks' moves follow the Bank of Canada's surprising decision Tuesday to leave its benchmark overnight rate unchanged at three per cent, rather than lowering it by a quarter-point as most bank economists had expected.

The central bank's overnight rate influences the commercial banks' cost of raising short-term funds, which are then used by them in their lending businesses. Longer-term funds tend to be affected more directly by the bond market than by the central bank.

Earlier in the year, central banks were worried about slowing economic growth, but in recent weeks the focus has shifted to inflation, suggested Bank of Montreal economist Doug Porter.

"We have seen some very extreme moves in market interest rates in recent days and recent weeks. Basically the bond market is swinging wildly between a possible U.S. recession and global inflation," Porter said.

Central banks around the world have faced the prospect this week of oil prices hitting sustained record highs.

On Tuesday, the Bank of Canada defied expectations by putting a stop to the downward trend of its key interest rate, while saying that inflation is becoming a threat to the economy.

"The expectation is that rather than (mortgage) rates staying where they are right now or going down, the consensus is rates are going to be back up," said Warren Jestin, chief economist at Scotiabank.

"In our view, we're probably going to see in the next couple of months more concern about inflation, more of a back-up in interest rates, although by the end of the year they're going to come back down again."

In general, bank rates tend to stay relatively in swing with each other, but the sudden change in the outlook for interest rates may have thrown some of the banks for a loop.

But Jestin suggests that eventually the Canadian banks will fall in-line with each other on their mortgage rates.

"The sea change in the market has been so sudden that you may well find that the adjustment in mortgage rates occurs over a period of a few days or perhaps a few weeks," he said.

No comments:

Post a Comment