November 17, 2016
The Trumpflation Effect: Why Canadian Mortgage Rates Are Rising
If there’s one thing that markets hate, it’s uncertainty – and the global economy has experienced that in spades following the victory of U.S. president-elect Donald Trump. Various types of investments, including stocks and the bond market, have been in flux as the financial implications of a Trump presidency remain unclear. And Canadians haven’t been immune to these market swings; the cost of borrowing here has been ticking higher as a result.
Canadian mortgage rates, which have been priced historically low for the last several years, are reversing on that trend; TD and Royal Bank of Canada both hiked their fixed mortgage rates this week, as they shoulder a combination of economic unease and new mortgage rules.
Related Read: New Mortgage Rules May Impact Your Ability to Buy a Home
TD has raised its special rate for four-year fixed terms to 2.44% (+ five basis points), and five-year fixed terms to 2.69% (+ 10 basis points). RBC has pushed rates even higher, hiking both four- and five-year mortgages by 30 basis points, to 2.79% and 2.94%, respectively. They also increased three-year terms to 2.69%.
These changes follow TD also raising its Prime rate earlier this month to 2.85%, despite no rate change from the Bank of Canada. It is anticipated that more lenders will follow suit.
What is Pushing Fixed Mortgage Rates Higher?
In short, Canada’s banks are responding to fears that inflation will rise in the U.S. as a result of Trump’s spending plan and fiscal stimulus promises. These concerns have set off a domino effect in the bond market, which directly impacts Canadian fixed mortgage rates.
Bond investors dislike inflation – it devalues their investments – and so they have been dumping their bonds in the election aftermath. This has caused bonds to devalue, which pushes their yields (the interest guaranteed to the investor when they cash their bonds in), higher. While higher yields may sound like a positive thing, it’s actually the opposite, as it signals the risk associated with the bond has grown. As banks base the price of fixed mortgages on bonds, rates are rising along with yields which have since hit an 11-year high wiping out a full $1 trillion out of the global bond market.
Prior to the election, these bonds were considered “safe haven” investments and were extremely popular with investors. Yields have been at record lows for several years – hence the great fixed-rate discounts Canadians had been enjoying.
What About Variable Mortgage Rates?
The Bank of Canada (BoC) is responsible for variable mortgage-rate pricing; eight times a year, it announces its trend-setting “overnight lending rate”, which is then used by consumer lenders to set their own Prime rate. This rate is one of the tools the BoC uses to keep the Canadian economy stable; it cuts the rate when the economy is underperforming so consumers can continue to borrow and spend. Alternatively, raising the rate is a signal the economy is improving.
The overnight lending rate is currently 0.5%, and has been since July 2015. The Bank cut the rate twice last year to accommodate fallout from lower oil prices and weak export industry (prior to this, it had remained at 1% since September 2010).
The BoC has signalled that it is likely to cut the rate again soon, as Canadian economic conditions remain lacklustre. However, their intentions could very well be “Trumped”, as the U.S. Federal Reserve – the American equivalent of the BoC – is likely to hike their own trend-setting rate as a result of rising inflation. The chance of such a hike, which would occur during the Fed’s December 13 – 14 meeting, is currently pegged at 94% by traders and analysts. This has led to speculation that the BoC may follow with a rate hike of its own.
However, the two central banks going separate ways with monetary policy, while unusual, isn’t impossible. While the BoC has traditionally followed the Fed in lockstep, Deputy Governor Timothy Lane says that won’t necessarily be the case now. “We are free to adjust our policy interest rate in the context of Canadian economic conditions,” he stated in a speech in Waterloo this week. “And, in particular we do not need to move in step with the Federal Reserve.”
Will Rates Continue to Rise?
It’s certainly possible, and a lot of uncertainty remains in the market as Trump has yet to clarify what his fiscal spending plan will actually entail.
It remains to be seen whether the bond market will react to those measures, or what the BoC’s next step will be. If you’re a homebuyer navigating the market amid these uncertain times, it’s more important than ever to surround yourself with good real estate professionals, and compare today’s available mortgage rates; while the big banks are hiking their offerings, there are still tons of fixed competitive options available. As well, locking into a good rate now can provide some shelter from economic uncertainties to come.
Are you worried about rising mortgage rates in Canada? Share your thoughts with us in the comments!