rbc canada

Canadian Banks Hike Mortgage Rates to Start 2018

Steve Saretsky -

Mortgage rates are on the rise. This has been the growing trend over the past year. While normally a small rate increase wouldn’t be newsworthy, each little hike becomes increasingly more impactful with Canadians carrying record levels of household debt, record high house prices, and record low interest rates. It’s a concoction that has the whole world watching the Bank of Canada.

Just last week the Canadian unemployment rate fell to 5.7% a 40 year low. This has put further pressure on the Bank of Canada to hike interest rates by another 25 basis points.

As of today the odds of a Bank of Canada rate hike on January 17 sit at 86%. Further, the 5 year Canadian bond yield (which is closely correlated to 5 year fixed mortgage rates) has jumped, now hovering around 2%, the highest it’s been since 2013. Up nearly 75% from a year ago.

Canada 5 year Government bond yield
Canada 5 Year Government Bond Yield

Naturally, this has pushed up 5 year fixed rates at RBC from 3.39% to 3.54%.

More importantly, this has prompted several of Canadas big banks to increase their overnight lending rates (the one’s used to stress test) prior to the Bank of Canada announcement next week.

Both RBC & TD raised their overnight lending rate to 5.14% from 4.99%, with other big banks expected to follow. This is critically important as it will raise the new minimum requirement for all Canadian borrowers, who as of January 1, are required to pass a mortgage stress based on that rate, regardless of their downpayment.

For example, despite getting a variable rate mortgage for say 2.5%, the borrower will have to undergo a stress test at the overnight rate of 5.14%. Again, this typically reduces borrowing power by about 20%.

However, this latest increase from 4.99% to 5.14% would reduce borrowing power by an additional 1.4%.

We now live in an environment where every rate increase matters. Following Canadian bond yields and the Bank of Canada will be an important task in 2018, and it affects all of us.

Join the Monday Newsletter

Every Monday morning you'll receive a short and entertaining round-up of news on the Vancouver & Canadian Real Estate markets.

"*" indicates required fields

The Canadian Economy

Steve Saretsky -

Happy Monday Morning! We got a string of new data this past week confirming inflation in consumer goods, and housing are proving to be more than transitory. Canada’s consumer price index continued to drift higher with prices hitting an 18 year high, up 4.7% from last October. The recent floods in BC...

Steve Saretsky -

The calls for impending interest rate hikes continues. CIBC’s chief economist, Benjamin Tal, was out recently suggesting the Bank of Canada could hike its benchmark interest rate at least six times beginning in early 2022. “I think there is a risk of getting into the market at today’s rates,” noted Tal....

Steve Saretsky -

The BC Government announced it is looking at several cooling measures for the housing market in 2022. They have highlighted two measures. The first is an end to the blind bidding process, and the other is a mandatory “cooling off period” which will allow any buyer a 7 day recession...

Steve Saretsky -

The Bank of Canada continues to slowly drain liquidity after flooding the system with a firehose of cash during the pandemic. Bank of Canada governor Tiff Macklem announced the end of Canada’s QE program (also known as money printing). Furthermore, in Macklems words, “We expect to begin increasing our policy...

Steve Saretsky -

Consumer price inflation ripped higher in September, surging 4.4% year-over-year, the fastest pace of price increases in 18 years. Let’s discuss this further. We have an inflation problem and the Bank of Canada remains of the view that inflation will be transitory. Although they really can’t say otherwise, for if...

Get the Saretsky Report to your email every month

The Saretsky Report. December 2022