Real estate note

Despite warnings from market watchers, mortgage rates remain at historic lows, at least for now. And while lenders expect upward pressure in coming weeks, there's is no quarantee it will automatically lead to increases to homeowners.

For months, market watchers have warned prospective home buyers that mortgage rates are bound to shoot higher as the economic recovery takes hold and the Bank of Canada ratchets up its key overnight lending rate.

Yet a month after the bank’s first small increase mortgage rates are still at historic lows. Variable rate mortgages can be scored for less than 2 per cent, locked in five year rates are below 4 per cent, with the Bank of Montreal offering a 4.99-per-cent option.

That’s because as home buying slows, mortgage lenders need to compete harder to keep their loan books growing. They have pools of capital that need to be spent, and if that means discounting a mortgage then that’s what they’ll do.

"When there is a drop in demand we all have to compete," said John Panagakos of the Mortgage Centre in Toronto. "We’re no different than grocery stores – we have sales."

Most of the money banks lend in the form of mortgages is borrowed, and the bank looks to interest rate swap rates – not the Bank Of Canada rate – to estimate what it will cost to borrow money throughout the length of the mortgage. The rate takes into account investors’ expectations of interest rates over the next five years, and their evaluation of a bank’s credit worthiness.

The rate is generally going to be higher than the rate on the five-year government bond, because banks are riskier borrowers than the government. Usually the two rates will trend in the same direction, though the spread between them may widen or narrow.

Although those rates have been holding steady, lenders expect upward pressure in coming weeks. That won’t lead to automatic increases, however, for homeowners.

"There’s been an appetite to help our customers buy homes even if there is upward pressure on rates," said John Turner, director of mortgages at BMO. "We’re trying to hold the line on rates regardless."

So higher Bank of Canada rates will eventually make it more expensive to borrow money. But it’s not the only thing at work as the bank decides how much to charge you for a mortgage.

(prepared by Steve Ladurantaye/Globe & Mail)