Two more big banks announce mortgage rate hikes

Two more of Canada's big banks have raised their mortgage rates, with industry watchers saying this is likely just the beginning of a cycle of rate hikes that could see the cost of financing a home rise by 1.5 per cent within the next year.

CIBC and National Bank announced Tuesday they are raising rates on their closed mortgages with terms of three, four and five years, as of Wednesday. This follows similar moves Monday by three other banks -- RBC Royal Bank, Laurentian Bank, and TD Canada Trust. Those rate hikes took effect today.

All four banks are hiking their posted rate on five-year terms by six-tenths of a per cent to 5.85 per cent from 5.25 per cent.

That means a homeowner taking on or renewing a mortgage of $250,000 at the new posted rate of 5.85 per cent over a 25-year amortization period would pay $1,577 per month. Prior to Tuesday's hike, that mortgage would have cost $1,489 a month -- $88 less.

Rates on three- and four-year fixed-rate mortgages also rose by between 20 and 40 basis points, depending on the bank.

Rates for shorter-term mortgages tend to reflect the banks' borrowing costs on bond markets, explains Business News Network's Mark Bunting. He notes that the banks – and everyone else – are expecting the Bank of Canada to raise interest rates this summer and that will affect bonds.

"In anticipation of that, we're seeing bond yields rise, government bond yields are moving higher, and mortgage rates are largely pegged to bond yields," he explained to CTV News Channel Monday night.

"The big banks fund their operations by selling their own bonds, and investors are demanding a higher payment for those bonds. So it's getting more costly for banks to fund their operation, so of course, they pass those higher costs on to consumers."

Kelvin Mangaroo, the founder of RateSupermarket.ca, a website that lets consumers compare mortgage rates, notes that for now, variable mortgage rates haven't budged.

"Fixed rates and variable rates are influenced by different factors," he pointed out to Canada AM Tuesday.

While fixed rates are influenced by government bond yields, variable rates are influenced by the Bank of Canada's overnight lending rate. Assuming the inflation rate stays steady over the coming months, the anticipated Bank of Canada lending rate hikes are still a few months off, Mangaroo said.

"If economic conditions stay as they are, variable rates could stay pretty steady until the summer," he said.

Still, that will change soon enough, since the long period of historically low home-borrowing costs that Canadian homeowners have enjoyed for years is likely coming to an end.

The bank has kept its key overnight rate at a historic low of 0.25 per cent for more than a year to help stimulate the economy. But with indications that the economy is steaming ahead again, the bank needs to keep inflation in check with higher interest rates.

BNN's Michael Kane says while the mortgage rate increases this week will be small, rates will almost surely continue to rise over the next few months.

"The latest guess I have from one economist I spoke to was that once the Bank of Canada starts raising the benchmark lending rate, about a year from now, we could be 1.5 per cent higher than we are right now," he predicted to Canada AM Tuesday.

The rate hikes should help dampen the hot housing market seen over the past several months.

But Gregory Klump, chief economist at the Canadian Real Estate Association, says even though mortgage rates are rising, they are still relatively low in the greater historical context.

"Even with interest rates expected to rise over the second half of this year, it's going to be a while before mortgage rates are basically neutral. Even with interest rates rising they're still going to be stimulative; just not as much," he told The Canadian Press.