Why lenders are quietly raising mortgage rates
The Bank of Canada has kept its overnight lending rate to an all-time low, an unheard of 0.5 per cent, and it says it plans to keep it that way for some time. So why are some banks raising their own lending rates despite this?
As many of you know, Canada’s main bank’s lending rates dictate variable mortgage rates, while other factors such as bond yields affect fixed mortgage rates. The cut in mortgage rates that followed the Bank of Canada’s move to slash lending costs theoretically made it easier for those looking at the real estate market to buy property, while helping to heat up investment.
However, according to some experts, it’s not a matter of banks looking at big-picture economic factors so much as it’s a game of “follow the leader.” Apparently, a major Canadian lender quietly raised its own prime lending rates, which opened the door for other banks to follow suit. However, there’s likely more to it than that.
For example, some domestic lenders are reportedly stretched too far with new business and want to try to slow the number of mortgages they’re backing, and raising rates is one way to do that.
Lenders typically increase interest rates when they feel they’re backing a risky deal, even when the borrower falls within acceptable financial parameters. According to MoneySense magazine, the government may start charging banks a deductible on defaulted mortgages, much like your auto insurer charges a deductible to you following an accident to get your vehicle repaired. That means the banks would have to cover a portion of the defaulted home loan, which drives up the lending risk.
That’s not great news for domestic and foreign buyers who were looking to cash in on the variable rate discounts. Many of the most competitive lenders in the country have raised variable lending rates by 0.25 per cent or more (fixed rates have also jumped), which is not a small number when you’re looking at a property worth $400,000. And with Canadian household debt at an all-time high, a small change in monthly payments could be a challenge — or catastrophic — for some.
Does that mean you need to run out and lock in a mortgage now, before rates rise any more? Not necessarily, according to the Huffington Post. Canada’s economy is still underperforming, which means the Bank of Canada could lower rates again in the future, according to the article.
With many rushing out to lock in a mortgage before rates rise further, it could also create more bidding competition that could drive the cost of homes up in the short term. So sit back and be patient, advise some experts
Keep in mind that the Bank of Canada also said recently that many key Canadian real estate markets are overvalued by up to 30 per cent, so a burst housing bubble could mean a loss in a current investment.