Canadian Mortgage Rates Rise
In August to September of 2013, the Canadian banks started to increase the Canadian 5 year fixed mortgage rate on Canadian mortgages. The popular 5 year closed fixed rate was increased by all the major Banks, including Laurentian, RBC, BMO, Scotia Bank and TD.
The discounted 5 year 'special' rate at the major banks is now in the region of 3.79% to 3.90%. This is still ridiculously low by historic standards, but quite a bit higher than rates were even last year, when under 3.00% was possible for a 5 year fixed mortgage. Lower rates are possible with other lenders on a case by case basis.
Why have rates increased?
The 5 year closed fixed mortgage rate is a closely watched metric, and is controlled to a large degree by the bond markets. The rate is priced relative to the yield on a 5 year Canadian bond. That yield has been increasing of late, which has caused the Banks to adjust their 5 year mortgage rate upwards.
The primary reason for the increase in bond yields is because the American economy is improving and growing again. This causes many to feel that our GDP may increase, stoking inflation fears. Increased inflation expectations cause bond buyers to demand higher yields on bond investments. Other factors include our weakening Canadian dollar (which makes holding Canadian bonds less attractive) and a cyclical shift from bonds into stocks globally.
What is the likely impact of a rate increase?
If recent history is any guide, the increase in rates will be short lived - in the sense that the rates have been adjusted up and are likely to stay at their new level throughout the winter. The uptick in rates has caused a boost in the Toronto real estate market, with condos sales and prices showing improvement, along with the already strong low-rise home market. This is inevitable, as Toronto home buyers who were pre-approved at the lower rates rush to find homes and close deals with Toronto home sellers before their pre-approval expires or is adjusted upwards.
Once this temporary demand boost is satiated, it's likely that the market will slow over the winter months.
Again, if recent history is any guide, and if the global economy does not provide any large surprise or shock, it is likely that rates will come down in the spring - or at least the discounted rates offered by Banks will fall during the spring. Banks will want to boost lending and spur the market during the spring months, and so some incentives are more than likely during this period.
Having said that, the era of ultra-low rates appears to be slowly but surely coming to an end. Buyers will have to adjust to the new reality.
Your Toronto Century 21 realtor should be able to advise you on current market conditions, and help put you in touch with a mortgage lender who can get you qualified in time for your spring home search. Good luck!
Ram Rajendram is a Toronto Real Estate Broker with Century 21 Harvest Realty Ltd. He sells condos and houses throughout the GTA, and assists home and condo buyers with their purchasing needs. He is also a Canadian Chartered Accountant and holds a Bachelors Degree in Economics from the London School of Economics (LSE)