Long-term mortgage rates on the rise
Banks' borrowing costs rising on bond market
http://www.yourhome.ca/homes/article/648238
June 10, 2009
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RITA TRICHUR
Soaring bond yields have set the stage for a second round of interest rate hikes on residential mortgages in about a week.
After nudging rates higher on longer-term mortgages last Wednesday, Toronto-Dominion Bank yesterday raised borrowing costs on its five-year, fixed-rate loan by 40 basis points to 5.85 per cent, effective today.
Last week, TD and the other banks increased rates on five-year, fixed-rate mortgages by 20 basis points to 5.45 per cent.
While no major competitor had followed TD's move by late yesterday, experts suggested higher rates are likely inevitable because banks are facing higher borrowing costs on the bond market. Banks tap the bond market to finance mortgages because they lend out more money than they attract through deposits.
"We don't have a fully matched book and I would guess that none of the Canadian banks have a fully matched book in terms of deposits matching loans," said Joan Dal Bianco, vice-president of real estate secured lending at TD Canada Trust.
While mortgage rates rose slightly last week, that move was insufficient to offset the bank's higher costs because bond yields have climbed higher since then.
"And unfortunately, we're now having to cover that gap, or at least close it a little bit," Dal Bianco said.
When asked if consumers should expect more mortgage rate increases, she replied: "I think we're going to see, over the next year, lots of changes as the economy starts showing positive signs."
The sharp spike in bond yields is a global phenomenon and the rise in Canadian yields has been milder compared with other countries, said Doug Porter, deputy chief economist at BMO Capital Markets.
The main reason that yields are rising is because the bond market is beginning to price in the prospect of an economic recovery later this year or next year, he said.
"I guess that's the good news part of the story. The bad news is that there is actually a cost for the economy in terms of raising the cost of money for some borrowers."
To a lesser degree, longer-term yields are also rising because the bond market is worried about the future prospects for inflation as governments around the world issue massive amounts of debt to stimulate economic growth.
Porter, however, also noted that home sales have "perked up" a bit in the past couple of months, fuelling more consumer demand for mortgages. "That's probably played a small role in this rise in mortgage rates as well," he said.
While TD is experiencing increased demand for mortgages, Dal Bianco insisted that played no role in the rate change. "It is strictly the bond market," she said.
Mark Chandler, a senior fixed income analyst at RBC Capital Markets, said long-term mortgage rates are still at near-historic lows.
"The hope that you can do better than that – or even maintain that for an extended period of time – that may be hoping for a little too much, really."
