INTEREST RATES: Royal leads banks in third rate hike in a month

Banks have begun a third round of mortgage rate hikes in less than a month, a swift ascent that shows how lenders plan to re-inflate their profit margins in the wake of the financial crisis.

The rate hikes, which are coming faster than anticipated, are expected to have a dampening effect on the housing market. Royal Bank of Canada, the country’s largest bank, led the way for the third time yesterday, boosting the price of its fixed-rate mortgages by 15 basis points. The posted rate on a five-year closed mortgage is now 6.25 per cent, an increase from the previous rate of 6.10 per cent. Toronto-Dominion Bank followed suit within hours, boosting its mortgage rates by between 15 and 25 basis points.


The moves come after the Bank of Canada signalled last week that its key lending rate will rise as early as June, with central bank Governor Mark Carney dropping a pledge to keep borrowing costs at their record low levels until at least the second half of the year.

But it appears that RBC’s move was based as much on a strategic decision to reestablish its profit margins as it was on new developments.

Banks generally base their fixed-rate mortgage prices on their funding costs, which are heavily influenced by the yields on five-year Canadian government bonds. That yield, about 3.1 per cent, was roughly the same yesterday as it was when Royal Bank hiked rates less than two weeks ago, though it did shoot higher for some time in between. "Mortgage rates are tied to our funding costs which change from day to day," a spokeswoman for the bank said. "Our long term funding costs have gone up considerably since December. We have held off in passing on these changes to our clients, but it is now necessary for us to increase the identified fixed-rate mortgages." Ian Lawrie, a mortgage broker in British Columbia, said he expects the rate hikes will push many first-time buyers out of the market. "Other buyers who require a mortgage will also feel the pinch and will set their sights lower," he said. Peter Norman, senior director of economic consulting at Altus Group, said mortgage rates can sometimes move out of step with bond yields because decisions can be made with a bit of a lag. "We’re moving into a higher interest-rate environment. That’s been the song sheet for the past year, so that’s what we’re seeing now happening," he said, adding that he believes housing activity will subside next year as pent-up demand fades.

While the majority of Canadian banks had not followed the latest mortgage rate jolt by late yesterday afternoon, Barclays Capital analyst John Aiken said he expects them to do so once again. "We do not believe that Royal will be lonely for long as profitability will likely outweigh any market-share aspirations," he wrote in a note to clients.

(prepared by Tara Perkins and Tavia Grant/Globe and Mail)