Royal Bank of Canada has just announced that they will be increasing the mortgage rates effective Thursday, November 17th, 2016. These new rates are a result of higher bond yields and new federal mortgage rules that have made it more expensive for banks to access money for mortgage loans. These changes will affect any amortizations under 25 years.
The recent United States election with Donald Trump victorious has caused a massive sell-off in the bond market. The sell-off is due to investors’ concern that Trump’s tax cuts and infrastructure spending will cause higher inflation. Therefore, the sell-off has moved bond yields higher, and fixed mortgage rates and bond yields go hand in hand. Banks use a variety of funding sources to find the money to lend to people wanting to buy homes, but one of the main ones is on the bond market. Simply put, banks make money on the spread between how much they have to pay investors to borrow money, and what they then turn around and charge homebuyers for mortgages.
When the bank's costs increase, they often pass that along to consumers in the form of higher lending rates. The bank is raising its special offer for a five-year fixed-rate mortgage to 2.94 percent, an increase of 30 basis points. The lender is also raising its special offer for a four-year fixed-rate mortgage to 2.79 per cent and a three-year fixed-rate mortgage to 2.69 per cent, increases of 30 and 25 basis points. Rates for homeowners who want to take more than 25 years to pay down their mortgage has jumped by even more: The three-year rate is now 2.79, the four-year is 2.89 and the five-year is 3.04 per cent — increases of 35, 40, and 40 points.
For example, if someone who owes $300,000 on a 25-year mortgage locked into a five-year term, under the old rules, they would have paid $1,364 per month. With the new rules, their monthly payment jumps to $1,410 — an extra $46 every month. But over the entire loan, that adds up to more than $13,600 in extra interest costs.
Earlier this month, TD hiked its prime rate to 2.85 per cent in anticipation of new rule changes set to be implemented at the end of this month that will increase the cost of insuring mortgages, especially for alternative lenders.