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Mortgage Rates Creep Up

Courtesy of Financial Post
By Tim Shufelt

For Canadians now accustomed to rock-bottom mortgage rates, a harsh reality looms.

Rates are officially on the upswing, an indication the country's housing market is finally poised to cool off, and the beginning of the end to historically low rates.

It's a move being closely monitored by those with variable-rate mortgages trying to cling to minimal monthly payments for as long as possible.

Is now the time to lock in to a fixed rate?

"That's the million-dollar question," mortgage broker Paula Roberts said Monday. "We've had a great ride for the longest time, and we know the ride's almost over."

Variable-rate mortgages have recently dipped as low as 1.5 per cent, Roberts said.

"It's really difficult for someone who has 1.5 per cent to have to lock in to 3.75 per cent. That's a big jump, and that's when grief sets in a little bit. But 3.75 per cent, historically, is still a very, very low rate."

Canada's two biggest banks, Royal Bank of Canada and Toronto-Dominion Bank, as well as Laurentian Bank, announced Monday they are raising the rates they charge on certain fixed-rate mortgages, including the benchmark five-year mortgage, which jumped 60 basis points to 5.85 per cent, effective today.

"This is actually a fairly large increase, reflecting what's happening in the bond market lately," said Benjamin Tal, senior economist with CIBC World Markets.

Anticipation over the Bank of Canada raising its overnight lending rate, possibly ahead of schedule, is pushing up bond yields, Tal said. And rising yields puts pressure on fixed-rate mortgages.

RBC and TD also hiked four-year term closed mortgage rates by 40 basis points to 5.34 per cent.

RBC's three-year product rose by 20 basis points to 4.35 per cent, while the equivalent at Canada Trust gained 40 basis points to 4.7 per cent.

In addition, in mid-April new rules come into effect that tighten lending requirements, making first-time buyers meet an income test that says they can make payments based on the five-year fixed rate.

The two effects combined are certain to price some prospective buyers out of the market, said Gregory Klump, chief economist with the Canadian Real Estate Association.

"Certainly at the margins, this will have an impact," he said.

While the hikes are significant, Klump said the heightened rates are still very attractive.

"They're still stimulative, they're just not as stimulative."

But analysts say that price growth in Canada's housing market, which for years has been red-hot and even remained robust during the recession, is not sustainable.

Tempered demand and a smaller pool of buyers is required to moderate prices and make housing more affordable, said Sal Guatieri, senior economist, BMO Capital Markets.

"There is a risk if the market does not cool down, we could see a correction down the road."

Before the two banks hiked rates, mortgage interest payments as a share of income were around the same proportion as four years ago, when rates were much higher, Tal explained.

"That reflects the fact that we took so much mortgage, which shows the starting point is not great in terms of affordability. That's why we'll see the bank being very effective in its ability to slow down the market. And that's a good thing."

Expect a gradual softening of the real estate market in the second half of 2010 and through 2011, Tal said. "The highs will not be so high and the lows will not be so low."