On 12/14/2010, The Royal Bank of Canada (RBC) [RY/tse:RY] announced mortgage rate increases, along with the Toronto Dominion Bank (TD Canada Trust) [TD/tse:TD]. It is expected that the other big banks will raise rates by the end of the week.
Royal Bank increased its 5 year closed mortgage 0.20% to 4.24%. Its 6 month convertible rate increased 0.10% to 4.05%. Other special rate offers also increased.
TD Canada Trust’s 5 year closed rate increased 0.20% to 4.24%. Its 1 year closed mortgage will increased 0.29% to 2.94%. Rates became effective December 15, 2010.
The rate hikes are a result of increased borrowing costs due to interest rates rising in the bond market. Bond yields have significantly increased over the last few weeks due to falling bond prices. Banks which use bond markets to borrow money, are paying higher rates to borrow.
This comes after the Bank of Canada’s recent announcement regarding the overnight lending rate, which was held steady. However, as we’ve seen in the past the commercial banks no longer follow the central bank’s rate decisions, and act independently on their own rates. This also follows the statements made by the BoC’s Mark Carney, who said that Canadian household debt-to-income ratio is at a record high. According to Statistics Canada, it was at 148% in the 3rd quarter (which is higher than the United States).
Investors and consumers should expect the central bank’s rate to increase significantly and swiftly, once the economy begins to grow at a stronger rate. We can also expect lending rates from commercial banks to increase much more rapidly and earlier, than the overnight lending rate increases of the central bank.
For now, the Bank of Canada indicated rates may remain stead for a while longer, but we should expect by the 3rd quarter of 2011 to start seeing increases of at least 0.25%. Consumers and investor should secure rates while they are low, and other lines of credit. Although the credit may not be used, it may be much more difficult to secure later on.
Thanks and Happy Investing!