Paying for a house in Canada just got a bit more expensive—and you may only have 48 to 72 hours to lock in the best rates. That’s because the recent announcement by RBC to increase fixed mortgage loan rates is just the start of things to come.
Royal Bank’s rate change announcement
RBC announced rate changes that will impact fixed-rate and longer amortization loans. The changes are scheduled to kick in this Thursday November 17, 2016.
According to the RBC press release, the bank will raise its discounted rate for a five-year fixed rate mortgage to 2.94%—an increase of 30 basis points; advertised discount rates on four-year fixed rate mortgages will increase to 2.79%, and three-year fixed rate mortgages to 2.69%—a 30 and 25 basis points increase, respectively. And home buyers looking to extend the amortization on their loan above 25 years can expect a 40 basis point increase to 3.04%.
“These are jarring numbers,” says Robert McLister, an independent mortgage broker and founder of Ratespy.com. “The increase marks a major shift in market thinking.”
Rate changes were expected
But it’s not like this is unusual. As Nawar Naji, an independent mortgage broker with Mortgage Architects, explains: “Every year we see a rise in rates at around this time.”
One big reason is that mortgage lenders are going into a new fiscal year. For the vast majority of lenders fiscal year end is somewhere between Oct. 31 and Dec. 31. Entering into a new fiscal year, mortgage departments don’t feel as much pressure to plump up their client numbers and this, typically, allows them to raise rates—even slightly.
And it’s not like RBC is the only one raising fixed mortgage rates. Increases have been submitted for almost all big banks and mono-lenders including: TD, MCAP, First National, Merix, and RBC, to name a few. Those that haven’t submitted fixed-rate increases, will do so, shortly.
It’s different this time
However, this year these rate changes come amidst some sweeping changes in both government regulations, as well as in those that lead.
Earlier this year, changes were announced by financial regulators that demanded mortgage lenders hold back a larger portion of money—just in case. Then the Canadian federal government tightened up mortgage qualification rules, making sure that every borrower is stress tested based on posted rates (which currently hover at 4.64%). Finally, Donald Trump was elected the new president of America.
All were events with a major impact on Canadian and U.S. housing markets and interest rates.
Impact of federal government & regulatory changes
One big change was that borrowers must now qualify for a mortgage based on posted rates, not their contract rate (which is, typically, a discounted rate that’s at least 200 basis points below the posted rate). This further erodes affordability and forces buyers to seek alternatives, such as a cheaper home (and mortgage) or a higher amortization on their mortgage loan.
However, borrowers looking to increase the length of the mortgage loan (known as the amortization), in order to increase affordability, will be in for a nasty surprise on Dec. 1, 2016. Additional regulatory changes now exclude certain types of properties or mortgage terms from participating in the mortgage insurance program.
Prior to this change, banks were required to take out mortgage loan insurance for any loan with less than 20% down. However, the type of property, the length of amortization, even the number of times the borrower financed the deal did not exclude the loan from mortgage loan insurance.
Under the new regulations, any refinanced mortgage or loans on rental properties, as well as any mortgage with an amortization greater than 25 years, will no longer be eligible for insurability after November 30, 2016.
“Lenders have estimated that this change will take away 30% to 60% of their insured mortgage business,” says McLister. “As a result, many are trying to pad out their mortgage volume before the November 3o deadline.”
The Trump factor
Then there’s Donald Trump. Elected as the next President of the United States on Nov. 8, 2017, his policies are considered to be a step towards inflation.
“Trump’s policies are very inflationary,” says Naji. “They are spending based and this will put pressure on the Bank of Canada.”
McLister agrees that Trump’s win is a factor. “Market rates are surging because of the implied risk of inflation under Trump.”
What’s worse, says Naji, is that there’s more to come. “It takes time for the proposed policies of any administration to make an impact.” Naji points out that the Federal Liberals have been in power for 13 months, and still they are only in discussions about proposed infrastructure spending.
If the U.S. starts down an inflationary road that will put pressure on the Bank of Canada. “It won’t spike, but it will be gradual,” says Naji. A quarter point raise here and there.
What to do: If you’re in the market to buy a house
Right now, if you’re in the market to buy a home, it makes absolute sense to get a locked-in pre-approval rate, says Naji. “Lenders usually build in a bit of a rate premium—say 10 to 15 basis points—for mortgages that will materialize 60 to 120 days from now, but getting a locked-in rate in an uncertain market makes sense.”
For McLister, time is ticking. “You have 48 to 72 hours to lock in some absolutely incredible rate deals,” he says. After that, they’ll disappear.
While mono-lenders and banks are scrambling to stuff their mortgage portfolios with clients before the Nov. 30 deadline, most start their rate increases two weeks before a regulatory deadline. “I’ve talked to some mortgage departments that are operating at three times their normal capacity,” says McLister. “And we’ll see that sort of activity for the next week, until rates go up across the board.”
What to do: If you’re shopping for a mortgage
For those home buyers who want a bit of security, now is the time to consider locking in to a fixed-rate mortgage.
“The difference between a fixed and variable rate is minimal,” says Naji—about a quarter of a percent apart. “For people who want security, to pay that premium is not a big deal.”
What to do: If have to break your mortgage
If you’re have to break your mortgage—say you’re selling your home and can’t port your current mortgage to the next house—you may want to wait until rates increase. “The higher the rates increase, the smaller the difference is between posted and current contract rates—which is reduces how much you owe based on the Interest Rate Differential (IRD) calculation.”
Keep in mind that most of the rate increases are for fixed-rate mortgage. While, TD announced rate changes to variable rate mortgages earlier this month, most lenders haven’t really addressed this side of the mortgage business. It doesn’t mean they won’t.
When variable rate mortgage do increase, this doesn’t mean your monthly payments will increase. For most lenders, your regular mortgage payments will remain the same, but the portion used to pay down the principal will drop as more of your payment is used to pay the interest.
What to do: If you have a variable rate mortgage
Those homeowners who chose a variable rate may be considering a conversion—switching from a variable to a fixed rate.
“Be careful,” says McLister. “There will be buyers with a low variable rate, say 2.1%, who call their bank to lock-in to the fixed rate, only to be hit with an 84 basis point increase in the mortgage rate.” He adds: “Last time we saw a spike in conversions, in 2013, the banks raked in the cash thanks to all these conversions.”
McLister offers some advice: do your homework. “Call around. Talk to a broker. Find out what your penalty would be to break your current mortgage.” Now compare the penalty fees with the cost of locking-in to a higher rate mortgage. “You might find it actually doesn’t make sense to lock-in to a fixed rate.”