It seems as if the ‘Interest Rate Wars’ are now over. Royal Bank of Canada (RBC), the nation’s largest mortgage lender, is increasing its interest rates today (June 10th), and many analysts are predicting that most other institutions will follow, leaving the concept of a rate war a thing of the past.
RBC’s special 4-Year Fixed Rate Mortgage is raising 10 basis points (0.10%) to 3.09%, and its 5-Year special is raising 20 basis points (0.20%) to 3.29%.
Mortgage rates became a focal point of controversy during the latter parts of 2012 as well as the first and ongoing quarters of 2012, as Bank of Montreal (BMO) rattled its competitors by introducing a deeply discounted 5-Year Fixed Rate Mortgage at 2.99%, forcing other lenders to follow-up suit in an effort to secure consumer business. These institutions were reprimanded heavily by Finance Minister Flaherty, who had been attempting to artificially inhibit the housing market. It is reported that when Manulife Bank reduced its posted rate on 5-Year Fixed Rate Mortgage to 2.89%, it received an infuriated phone call from Flaherty’s office, at which point Manulife quickly increased the rate back up to 3.09%. BMO has allowed that controversial special rate to expire.
At a recent even in Halifax on Thursday, Flaherty stated that banks are being “prudent in not reducing their rates.”
Among the numerous factors affecting lending rates, long-term interest rates such as movements in the 5-Year Government of Canada bonds, play a vital role in how banks have to pay for the funds they lend out to borrowers. The yield on 5-Year bonds was 1.44% on Thursday in comparison with 1.30% at the end of March. Although, the Bank of Canada left its trendsetting overnight rate alone at 1.00% at the end of May, officials acknowledged a more positive outlook for the global economy, which may indicate impending rate increases.
In my opinion, there are two major factors to consider here: RBC has proven itself to be the price leader in the lending market, and in most cases, competitors will follow the lead of RBC as it concerns interest rates. However, many of these same lenders are experiencing decreasing mortgage volumes, as Canadians start to save more and curb our voracious borrowing appetites. Additionally, as lending policies have become more restrictive, even nominal increases to rates will have the adverse effect of decreasing the pool of suitable borrowers. The question then becomes one of balance; does a lender choose to sacrifice margins (profit) for volume, or toe the line. I believe that interest rates will increase, but for lenders to achieve profit-to-volume balance and appease their shareholders, lending guidelines will have to become less obstructive to ensure maximum profitability. And as far as the Bank of Canada is concerned, although this most recent interest announcement had more hawkish tones about the current global economic condition, it will also be exceptionally difficult to boost rates while the Fed remains adamant on capping their rate.
Regardless, if you’re thinking about making a switch, purchasing a home, or refinancing your mortgage, contact your REALTOR® & Mortgage Broker, or feel free to give us a shout, and We’ll be happy to chat.
REALTOR® and Senior Private Loan Specialist - Residential & Commercial
Century 21 Desert Hills Realty and EQ Lending Corp.
Broker/Owner of EQ Lending Corp.