For Canadian mortgage borrowers, interest rate hikes could become a grating refrain in the coming months.
Canadian banks are raising the cost of mortgage borrowing in response to rising bond yields and expected monetary tightening, marking the outset of what is expected to be an upward trend.
That's making a strong case for borrowers to lock into fixed rates before it's too late, said Benjamin Tal, deputy chief economist with CIBC World Markets. "The window is closing."
Toronto-Dominion Bank and Canadian Imperial Bank of Commerce both announced Monday hikes to their residential mortgage rates, the first increases since changes to the rules of borrowing were announced by the federal government last month. The other big banks were expected to follow the moves shortly.
Effective Feb. 8, the interest rate on the banks' benchmark five-year closed fixed -rate mortgage will increase 25 basis points to 5.44%.
Toronto mortgage broker Paula Roberts said rising borrowing costs will compel more of her clients to abandon ultra-low variable rates in favour of higher, fixed-rate mortgages.
That can be a tough decision for borrowers to accept higher payments, but not one that should strain a mortgagee's finances, she said.
"If you can't afford [the increase] ... that's a problem," Ms. Roberts said. "That's why the government has changed the rules."
In two stages over the past year, the federal government announced changes to the conditions of mortgage lending -- shortening the maximum amortization from 35 years to 30 years and requiring borrowers to qualify for a fixed-rate plan, even if they are opting for a variable rate.
Many who only qualify under the old rules, however, will try to secure mortgages before the amortization restrictions come into effect next month, Ms. Roberts said.
"There are going to be a lot of people that will enter into their agreements by March 18."
Much of the momentum in the mortgage market can be attributed to a bond selloff and rising yields across the board. That effect is partly a reflection of building global inflationary pressures as well as a world economy that is proving more robust than expected.
"In my opinion, the bond market will not be the place to be over the next six months, and if that's the case, you will see mortgage rates continue to rise," Mr. Tal said.
In addition, anticipation of increases to the Bank of Canada's benchmark lending rates is building, also contributing to rising yields, which puts pressure on fixed-income mortgages.
If there was any lingering doubt that the Bank will soon raise rates, last week's jobs report erased them. The report showed Canada added four times more jobs than expected in January.
"[It] creates a fairly powerful story for the Bank of Canada, which is clearly concerned on the domestic front," said Camilla Sutton, chief currency strategist at Scotia Capital Markets. "I think there's a material change."
So do investors. The probability that the central bank will boost its key policy rate by May, as measured by overnight index swaps, jumped to almost 75% after the jobs data.
The expected timetable could shorten further if the Canadian economy shows more surprises in advance of the Bank of Canada's decision on March 1.
"That's why the next two weeks will be extremely important," Mr. Tal said.
Mitigating the bank's urgency, on the other hand, is the recent strength in the loonie, which itself has a tightening effect, Ms. Sutton said.
"If we continue to see [Canadian dollar] strength, the Bank of Canada might back off the need to tighten."
Canadian banks are raising the cost of mortgage borrowing in response to rising bond yields and expected monetary tightening, marking the outset of what is expected to be an upward trend.
That's making a strong case for borrowers to lock into fixed rates before it's too late, said Benjamin Tal, deputy chief economist with CIBC World Markets. "The window is closing."
Toronto-Dominion Bank and Canadian Imperial Bank of Commerce both announced Monday hikes to their residential mortgage rates, the first increases since changes to the rules of borrowing were announced by the federal government last month. The other big banks were expected to follow the moves shortly.
Effective Feb. 8, the interest rate on the banks' benchmark five-year closed fixed -rate mortgage will increase 25 basis points to 5.44%.
Toronto mortgage broker Paula Roberts said rising borrowing costs will compel more of her clients to abandon ultra-low variable rates in favour of higher, fixed-rate mortgages.
That can be a tough decision for borrowers to accept higher payments, but not one that should strain a mortgagee's finances, she said.
"If you can't afford [the increase] ... that's a problem," Ms. Roberts said. "That's why the government has changed the rules."
In two stages over the past year, the federal government announced changes to the conditions of mortgage lending -- shortening the maximum amortization from 35 years to 30 years and requiring borrowers to qualify for a fixed-rate plan, even if they are opting for a variable rate.
Many who only qualify under the old rules, however, will try to secure mortgages before the amortization restrictions come into effect next month, Ms. Roberts said.
"There are going to be a lot of people that will enter into their agreements by March 18."
Much of the momentum in the mortgage market can be attributed to a bond selloff and rising yields across the board. That effect is partly a reflection of building global inflationary pressures as well as a world economy that is proving more robust than expected.
"In my opinion, the bond market will not be the place to be over the next six months, and if that's the case, you will see mortgage rates continue to rise," Mr. Tal said.
In addition, anticipation of increases to the Bank of Canada's benchmark lending rates is building, also contributing to rising yields, which puts pressure on fixed-income mortgages.
If there was any lingering doubt that the Bank will soon raise rates, last week's jobs report erased them. The report showed Canada added four times more jobs than expected in January.
"[It] creates a fairly powerful story for the Bank of Canada, which is clearly concerned on the domestic front," said Camilla Sutton, chief currency strategist at Scotia Capital Markets. "I think there's a material change."
So do investors. The probability that the central bank will boost its key policy rate by May, as measured by overnight index swaps, jumped to almost 75% after the jobs data.
The expected timetable could shorten further if the Canadian economy shows more surprises in advance of the Bank of Canada's decision on March 1.
"That's why the next two weeks will be extremely important," Mr. Tal said.
Mitigating the bank's urgency, on the other hand, is the recent strength in the loonie, which itself has a tightening effect, Ms. Sutton said.
"If we continue to see [Canadian dollar] strength, the Bank of Canada might back off the need to tighten."
