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Why to Expect More Mortgage Rate Hikes

by Yvonne von Jena | January 9, 2016


Recently, three of the big 6 banks raised their mortgage rates in the past week. According to Bloomberg, more increases are expected because of rising mortgage funding costs, increasing regulations and a weakening economy. “When you look at the funding picture, it’s getting more expensive for the banks,” says Meny Grauman, a financial analyst at Cormark Securities. “We’ve started to see cracks in credit and we know that’s probably going to continue to intensify. If it continues, the same logic that caused the banks to raise will continue to apply.” Yields on five-year benchmark government bonds, the part of the market where banks usually fund their mortgage lending, reached the lowest since August as new signs of slowing growth in China pushed the price of crude oil below US$35 per barrel. That led derivatives traders to assign a more than 50% chance the Bank of Canada will cut the benchmark interest rate to its record low of 0.25% by mid-year. Say the authors, the banks are feeling the pinch with higher borrowing costs as pressures on the economy make them look less credit-worthy. Investors now demand about 129 extra bps of yield to hold 5-year bonds from top-rated Canadian banks compared with government benchmark notes, the biggest premium tracked by Bloomberg data since 2010. For a point of reference, that premium was 51 bps at the end of 2009. Said Kris Somers, a Canadian debt analyst at Bank of Montreal, “Banks are paying more money for debt than they have in the past.” In addition to the higher borrowing costs generally, new government rules are also imposing higher costs on mortgage lending. CMHC increased the fees it charges banks to securitize mortgage debt and the Department of Finance increased the minimum down payment requirement for insured mortgages. The Office of the Superintendent of Financial Institutions (OSFI), also proposed higher capital buffers to back the loans. Canadian lenders hold 75% of the country’s mortgages. The trend of banks maintaining a margin buffer even with lower costs in the public debt market started last year, when the Bank of Canada cut its overnight lending rate and the banks did not pass the full savings onto consumers through their prime lending rate. The prime rate is used to price everything from variable mortgage rates to lines of credit. The same thought process prevails this year, Mr. Grauman said, as banks try to eke out profit in a tough economic environment. “‘Flat’ is the new ‘up,'” Grauman said. “You’re just trying to hold the line on your margin.”


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