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By The Canadian Press
TORONTO - Two of Canada's biggest banks are increasing some of their residential mortgage rates effective Tuesday in the latest sign that the era of historically low rates could soon come to an end.
The changes affect closed mortgages with terms of three, four and five years at RBC Royal Bank (TSX:RY) and TD Canada Trust (TSX:TD). Rates for mid-term mortgages like these tend to reflect the banks' borrowing costs on bond markets.
The biggest increase announced Monday affects five-year mortgages. Both banks are hiking their posted rate by six-tenths of a per cent to 5.85 per cent from 5.25 per cent.
A homeowner taking on a mortgage of $250,000 at the new rate of 5.85 per cent over a 25-year amortization period would pay $1,577 per month. Prior to Tuesday's hike, that mortgage would have cost $1489 a month, or $88 less.
The Bank of Canada is expected to begin raising lending rates this summer as it moves to fight growing inflationary pressures in the economy. The bank has kept its key overnight rate at a historic low of 0.25 per cent for more than a year to help stimulate the economy.
CIBC (TSX:CM) chief economist Avery Shenfeld said the central bank begins to step on the brake when it sees overheating in the economy, and economic growth in the first quarter has outperformed the central bank's forecast.
CIBC has lifted its own growth outlook for the first quarter of the year to over five per cent, due to strong indicators of recovery.
"The only reason the market is building in expectations for rate hikes is because it's seeing the economy as better able to withstand them," he said.
"Once the Bank of Canada starts pushing up short-term interests rates, and even in anticipation of that, it tends to spill out across the rest of the curve."
Mortgage rates hikes are a trend consumers should expect to continue, Shenfeld added.
He predicts the Bank of Canada will gradually raise key lending rates this summer, resulting in an increase of 0.75 per cent to one per cent by the end of the third quarter.
That would raise the average prime rate at the banks from 2.25 per cent to three per cent, which could tack on three-quarters of a per cent to the rates of homeowners with floating mortgage rates, Shenfeld said.
"Consumers are forewarned that when they look at borrowing today they have to factor in potentially higher costs," he said.
"Consumers have to be aware in taking on debt at historically low interest rates that down the road they will be higher and have to leave room for their ability to pay those higher rates."
When the Bank of Canada lifts rates, part of its intention is to take the fire out of the most interest sensitive segments of the economy, including the housing market, which has seen a particularly strong recovery, Shenfeld said.
The hot housing market is being driven, in part, by an influx of consumers willing to pay a premium for home ownership before interest rates rise.
Shenfeld said the rate increase could help dampen the house price inflation seen over the past several months.
And he added that the outperformance of the economy in the first half of the year will be countered by a slowdown in the second half.
"Not only do we expect weaker growth in the key US export market by then, but Canadian consumers may also be more temperate in the wake of a debt financed binge."