With signs of the economic revival becoming more visible, the major Canadian banks have begun to hike the mortgage interest rates, which the financial experts have described as the commencement of a phase of raise in rate that is likely to augment the expenses of home investments go up by around 1.5 per cent by the turn of this year. It may be mentioned here that in view of the global economic slump, the federal government of Canada had introduced historically low mortgage rates to perk up the real estate market.
On Monday last week, three leading banks of Canada - the RBC Royal Bank, TD Canada Trust and Laurentian Bank had announced hikes in the mortgage rates that became effective latter in the week. Close on the heels of these banks, the Canadian Imperial Bank of Commerce (CIBC) as well as the National Bank announced on Tuesday last week that they too would be hiking the interest rates on all their closed mortgages having terms of three, four and five years. The rise in interest rates by these two banks became effective on Wednesday last week (March 31).
It may be mentioned here that all these banks are raising their posted interest rate on five-year mortgage terms from the earlier 5.25 per cent to 5.85 per cent - a raise of six-tenths of a per cent. In other words, the hike denotes that a homeowner who is taking a new loan or renewing their mortgage worth $250,000 at the new rate of 5.85 per cent interest over a 25-year amortization or pay off period would now have to pay a monthly instalment of $1,577 compared to $1,489 - the amount paid before the recent interest hike. This denotes an additional monthly payment of $88!
In addition to hiking the rates on five-year fixed rate mortgages, these banks have also announced that they were raising the interest on three-year and four-year fixed rate mortgaged by 20 and 40 basic points. This interest hike will exclusively depend on the different banks.
Elucidating on the recent rise in mortgage interest rates after a period of historically low rates, Mark Bunting of Business News Network says that the new interest rates relatively short-term fixed mortgages are disposed to suggest the borrowing expenditures of the banks' on bond markets. Bunting as well as all others concerned now anticipates that the Bank of Canada will also hike the interest rates sometime during this summer and it will have an impact on the bonds.
Bunting further said that the profits from the bonds are on the rise simply in anticipation that the Bank of Canada will too hike the interest rates soon, since the mortgage rates are to a great extent controlled by the bond yields. Substantiating his view, Mark Bunting pointed out that the major banks finance their activities by trading their respective bonds and now the investors are insisting on an elevated imbursement from these bonds. Consequently, this is making the bank operations more expensive and hence, the banks are simply passing on this extra burden or the higher expenses to their clients.
On the other hand, the founder of RateSupermarket.ca, a Canadian website that enables the consumers to evaluate the mortgage fees, Kelvin Mangaroo points out that as of now the interest rates of variable mortgages have not changed. In an interview to Canada AM, Mangaroo indicated that different issues control the fixed mortgage rates and variable mortgage rates. The returns from the government bonds actually have an affect on the fixed mortgage rates, whereas the Bank of Canada's overnight or instantaneous loan rates.
Mangaroo was of the view that if the rate of inflation remains stable for the ensuing months, it is likely that it will be sometime before the Bank of Canada raises the rates on loans sanctioned by it. He further said that provided the economic environment continues to remain as it is now, the variable mortgage rates were likely to remain stable till this summer.
Unfortunately for homeowners in Canada, even the variable mortgage rates are bound to go up sooner or later. All the while, they have been enjoying the benefits of one of the lowest rates on home loans and now this privilege is going to come to an end.
It may be mentioned here that for over a year now, the Bank of Canada had maintained its strategic overnight interest rate on home loans probably at an all-time low of just 0.25 per cent with a view to help in fuelling the country's economy, especially the real estate industry. However, now with signs of the economy rebounding, the Bank of Canada will need to hike the interest rates gradually with a view to control inflation.
Michael Kane of Business News Network (BNN) said that while the raise in the interest rates announced last week are relatively of minor nature, the rates are more or less certain to keep on going up for the ensuing few months. Talking to Canada AM last week, Kane anticipated that going by the speculation made by one economist whom he spoke to recently, as soon as the Bank of Canada begins to hike the standard rate on lending, people would be paying about 1.5 per cent more interest rates compared to what they are paying currently. And all this will take only a year's time, he said.
It is expected that the hike in home loan interest rates will somewhat inhibit the residential real estate market that had been going robust during the last many months, primarily owing to Bank of Canada's commitment to maintain the historically low rates to keep the economy buoyant. However, the chief economist at the Canadian Real Estate Association (CREA) Gregory Klum is of the view that despite the hike in the mortgage rates, the housing market was unlikely to be affected much since the rates are still low in comparison to the bigger historical perspective.
Recently, Gregory Klum told The Canadian Press that although it is expected that the rate of interest on mortgages would continue to go up during the second half of the current year, it will still take some time for the mortgage rates to return to what they were before the Bank of Canada reduced them to a historic low. He further said that the residential real estate market would continue to be robust despite the increasing interest rates, albeit not as it was recently.