RBC Hikes Mortgage Rates as Bond Yields Spike

Royal Bank of Canada is hiking mortgage rates and making it more expensive for homebuyers who want to take more than 25 years to pay back their loan.

The special offer rates for three, four and five-year fixed rate mortgages are 10 basis points higher than for those with an amortization of 25 years or less, news outlets reported.

Starting November 17, a five-year mortgage from RBC will cost 3.04%, up from 2.94%. The bank also increased its three-year and four-year rates to 2.79% and 2.89%, respectively.

Earlier this month, rival Toronto-Dominion Bank raised its prime rate for variable-rate mortgages by 15 basis points, to 2.85% from 2.7%. A basis point is 1/100th of a percentage point.

However, TD’s change didn’t affect fixed-rates loans; RBC’s does.

The increases come as the banks grapple with the federal government’s crackdown on Canada’s frothy housing market.

In October, Finance Minister Bill Morneau announced higher qualifying rates for mortgages with down payments of less than 20%, as well as restrictions on the types of mortgages that can be covered by government-backed portfolio insurance.

The banking watchdog, the Office of the Superintendent of Financial Institutions, also imposed new rules that will require lenders to hold more capital against riskier mortgages. Combined, the changes were expected to make it most costly for financial institutions to lend against housing.

As the banks wrestle with these rules, bond yields have also started spiking. Since Donald Trump was elected president of the United States last Tuesday, the five-year government of Canada bond yield, which is used as a benchmark for mortgages, jumped 21 basis points to 0.96%.

The sudden spike affects banks because their mortgages earn a spread off of the five-year benchmark rate. Whenever their borrowing costs rise, they pass the increase along to customers who take out new loans.

However, there is a bright side. While higher mortgage rates are likely to cool the housing market, which affects new loan formations for the banks, these financial institutions will also earn better margins across their lending portfolios.

Their net interest margins, or the difference between their total borrowing costs and their total lending revenues, have plummeted in this era of low rates. Rising bond yields should allow them to add a few extra percentage points to the spread, resulting in better bottom lines.