Canadians’ borrowing costs getting pushed up - Fixed Rates Rise

If worries about the sickly U.S. economy and Ireland’s rocky financial situation seemed remote a few days ago, they shouldn’t anymore.
Those global concerns are pushing up Canadians’ borrowing costs when it comes to buying a home.

TD Canada Trust and the Royal Bank of Canada said separately that they are increasing some of their fixed-term mortgage rates by as much as one-quarter of a percentage point, effective Wednesday.
At both banks, five-year mortgages, one of the most popular among Canadian homeowners, will rise by 0.25 of a percentage point to 5.44 per cent.

Rates on three- and four-year mortgages are also increasing by a quarter of a percentage point, while one-and two-year rates will go up by 0.15 of a percentage point.
Rates for mortgages that have six, seven, and 10 year terms will be unchanged.

Five-year mortgages rates in particular are closely tied to yields (rate of return) in the bond market, which have recently rebounded, following about three months of declines.

That means Canadian banks have been paying a higher rate to borrow in the bond market in order to lend to customers. “In the past month, the five-year bond yield has risen quite substantially, given that rates are so low,” said Francis Fong, economist at TD Economics

While Canada’s economy remains relatively strong and the Bank of Canada has been hiking interest rates, concerns over the U.S. recovery continue to simmer.

The U.S. Federal Reserve hinted in late August that it planned to take additional measures to jolt the moribund U.S. economy back to life. Its preferred approach, quantitative easing, amounts to pumping more money into the economy.

The market began pricing in the Fed’s anticipated intervention, though it would take another two months to get all the details - a further $600 billion (U.S.) purchase of Treasury securities.

Since then, yields have rebounded. “The market was likely waiting a bit for the details to see what the price of bonds should really be,” Fong said, adding that the process is similar to the anticipation of a company’s stock price prior to an earnings announcement.

Anxiety in Europe also continues to play a role in the bond market as nervous investors demand higher yields in exchange for higher risk.

Irish bonds fell Tuesday as the prime minister expressed doubts that an agreement to resolve his country’s fiscal crisis could be reached at a meeting of European finance ministers.

Investors are also nervously watching as Greece and Portugal make attempts to manage their own massive fiscal crises.

Meanwhile, North American stocks fell broadly, in part due to concerns about Europe's debt problems, which may have helped demand for U.S. Treasury debt.

With files from the Star’s wire services - Source: By Madhavi Acharya-Tom Yew | Tue Nov 16 2010

What's the best strategy as mortgage rates rise?

Source ROB CARRICK - Globe and Mail Update
September 30, 2008 at 6:19 PM EDT

The credit crunch has hit home with yet another move by the big banks to jack up the cost of mortgages.

Mortgage brokers report that the big banks and other lenders have stopped offering variable-rate mortgages with a discount off the prime rate.

It was common in the first half of 2007 to get a variable-rate mortgage at prime minus a full percentage point, said Jim Tourloukis of Advent Mortgages in Markham, Ont. Since then, the discount had gradually fallen to 0.4 of a percentage point as of last week.

“As of yesterday, virtually everybody was offering variable-rate mortgages at prime,” Mr. Tourloukis said. “In other words, no more discounting.”

Forced to pay more to raise the money they lend out to customers, the banks have set fixed mortgage rates far higher than they would be under normal circumstances. Now, variable-rate mortgages have been affected as well. What's the right strategy for borrowers?

Your choices: a variable-rate mortgage at 4.75 per cent, which is the current prime rate at all major lenders, or a discounted five-year mortgage at rates in the low 5-per-cent range.

The lower variable rate means you'll save money in the near term, but it also opens you up to the risk that rising interest rates will boost your borrowing costs somewhere down the line.

“If I'm the average Joe, I would be taking the five-year rate right now because I don't know what's going on out there and I don't want to risk my house,” Mr. Tourloukis said. “I don't think rates are going to go up, but I don't want to worry about it.”

Mr. Tourloukis said about 90 per cent of his clients were going with variable-rate mortgages prior to this week, and he expects the same big majority to swing over to fixed-rate mortgages going forward.

The problem with fixed-rate mortgages – almost everyone picks the five-year term – is that you'll have to work hard to get a good deal. Posted five-year rates at major lenders are around 7.2 per cent, and some banks are posting “special” discounted rates of 6.14 per cent on their websites.

However, Mr. Tourloukis said he was able to get five-year mortgages as low as 4.99 per cent. Alternative banks and credit unions have been offering rates as low as 4.99 to 5.45 per cent.
Brian Matthey, a mortgage broker in Kingston, Ont., said five-year mortgages would be going for about 4.35 per cent today under normal circumstances in financial markets. He stressed the importance of shopping around for a mortgage right now and not settling for whatever discount your bank is willing to dole out.

“The banks are going to freewheel as they need to in terms of what they offer their clients,” Mr. Matthey said.

If you have any questions regarding this article or on variable or fixed rates, please call Greg Barrow, DLC Perfect Mortgages at 416 807 7123 or email gbarrow@dominionlending.ca