Canada’s mortgage rates remain near historic lows, but developments south of the border indicate a shift may be under way.
Homebuyers shuttered last month after RBC and TD Bank raised mortgage rates after the so-called “bond vigilantes” responded to Donald Trump’s shocking victory in the US presidential election.
Bondholders clearly aren’t happy with Trump’s plan to “Make America Great Again.” Their behaviour over the last four weeks has sent financing costs soaring, an effect not lost on Canadian lenders.
As of December 1, TD Bank is charging borrowers 25 basis points more for mortgages on rental properties. That includes charging borrowers an extra 10 basis points on loans that take more than 25 years to pay back.[1]
RBC enacted similar measures last month, hiking borrowing rates by 25 basis points for amortizations of 25 years or less. The four-year rate and five-year rate each jumped by 30 basis points.
The Trump Effect
To understand how the Trump effect is influencing Canada, it’s important to establish the context south of the border first. The outcome of the November 8 election had a major impact on the US financial system. On the one hand, the election result sent stocks to new record highs. On the other, it pushed US Treasury rates to ten-month highs, which led to a sharp rise in all types of loans (including mortgages).[2]
Volatility in the US bond market reflected growing concerns about inflation – namely, that it’ll rise much faster than previously expected. Trump has vowed to spend up to $1 trillion on infrastructure in order to rebuild America and boost economic growth. Combined with massive corporate tax cuts, fiscal stimulus could lead to faster inflation, which would require the Federal Reserve to raise interest rates at an accelerated pace. As the Fed leads, the Bank of Canada will follow (although not too closely, given the current state of the Canadian economy).
What It Means for Canadian Homebuyers
The threat of higher interest rates isn’t the only headwind facing Canadian homebuyers. Ottawa made it abundantly clear back in October that it is concerned about the nation’s housing market. Two weeks later, it implemented new mortgage rules that could impact some borrowers’ eligibility for a loan. This means that if you’re looking for a home, now is the time to strategize. For some borrowers, this could mean rushing to lock in the best mortgage terms possible while rates are still predictably low.[3]
If you’re currently shopping around for rates, experts warn that you may not be able to lock in the lowest rates for the full 120-day preapproval period. That’s because rates locked for 60 to 90 days usually cost slightly more. Borrowers wishing to lock in at 120 days without extra cost should be diligent about finding the right lender who won’t apply any penalties.
Uncertainty Becomes the Norm
The real challenge for borrowers isn’t that interest rates are going to rise drastically in the short-term. The more immediate concern is uncertainty. As politics continue to roil the bond markets, borrowers may find it more appealing to lock in for five years rather than going with the cheaper variable rate option. Borrowers should think long and hard about this. After all, variable rates are not only cheaper, they are less vulnerable to the current political climate.[4]
The US Federal Reserve is widely expected to raise interest rates on December 14 for the first time in a year. Homebuyers should pay attention to the Fed’s official policy position and what it might mean for Canada.
References
[1] Tim Kiladze (November 30, 2016). “TD hikes mortgage rates for rental properties and lengthy loans.” The Globe and Mail.
[2] Sam Bourgi (November 22, 20160. “Trump Effect Sends 30-Year Mortgage Rates to 10-Month High.” GoRion.
[3] Bob Carrick (November 14, 2016). “Trump’s win is a game-changer for mortgage strategies in Canada.” The Globe and Mail.
[4] Bob Carrick (November 14, 2016). “Trump’s win is a game-changer for mortgage strategies in Canada.” The Globe and Mail.
