Toronto-Dominion Bank became the second major lender to hike mortgage rates amid soaring bond yields and federal government rule changes – though it is taking a more measured approach than rival Royal Bank of Canada.
TD has raised the cost of its four-year and five-year fixed-rate mortgages by 5 and 10 basis points, respectively. (A basis point is 1/100th of a percentage point.) Its fixed four-year mortgages now charge 2.44 per cent annually, and its fixed five-year mortgages now charge 2.69 per cent.
The decision follows RBC's decision to raise mortgage rates more sharply. Canada's largest bank said Tuesday that it is raising its fixed five-year rate by 30 basis points, to 2.94 per cent.
RBC also implemented a new pricing structure that charges borrowers more if they choose longer-dated mortgages. Five-year fixed mortgages with amortizations longer than 25 years now charge interest of 3.04 per cent annually, a jump of 40 basis points.
But TD opted not to follow that move, which means that for home loans longer than 25 years, its mortgage rate is 35 basis points cheaper than RBC's.
RBC and TD's rate decisions matter because they come from the country's two largest banks, whose mortgage portfolios are worth a combined $402-billion. The banks often act in lockstep when making changes to mortgage rates, and they typically serve as a benchmark for the rest of the market – but not always.
Last year, after the Bank of Canada shocked the country with a surprise rate cut, TD considered keeping its prime rate steady – a decision that would have been at odds with the long history of lenders moving their prime rates whenever the central bank acted.
Although TD wouldn't say why, the assumption was that bank executives felt that net interest margins – the difference between banks borrowing costs and the rates these institutions charge for loans – had already been squeezed by historically low bond yields.
However, RBC soon lowered its prime rate, and TD followed suit. Yet the banks broke new ground because they lowered their prime rates by only 15 basis points, while the central bank cut by 25.
The new mortgage rate hikes comes as bond yields spike in the aftermath of the U.S. election. The five-year Government of Canada bond has seen its yield jump 25 basis points to 0.94 per cent in November alone. With mortgages, banks earn a spread off of the five-year benchmark rate, and when their borrowing costs rise, they eventually pass the increase along to customers.
Ottawa is also trying to crack down on easy lending standards that have been blamed for large increases in home prices in some markets, particularly Vancouver and Toronto. In October, Finance Minister Bill Morneau announced higher qualifying rates for mortgages with down payments of less than 20 per cent, as well as restrictions on the types of mortgages that can be covered by government-backed portfolio insurance.
The latter change is likely to have fostered RBC's new rates for different amortization lengths. Mortgages that take more than 25 years to pay back no longer qualify for bulk mortgage insurance. Even if these longer-dated loans aren't very risky, banks like to buy insurance for them, because it absolves them of having to hold any capital against the loans. The regulator deems them risk-free this way.