Soaring bond yields are setting the stage for a second round of interest rate hikes on residential mortgages in about a week.
After nudging rates higher on longer-term mortgages last Wednesday, Toronto-Dominion Bank is once again raising borrowing costs on its popular five-year, fixed-rate loan. Effective tomorrow, the posted rate on that mortgage moves 40 basis points higher to 5.85 per cent.
Last week, TD and the other banks increased their respective interest rates on five-year, fixed-rate mortgages by 20 basis points to 5.45 per cent.
While no major competitor had announced plans to follow TD's latest increase by late today, experts suggested that higher mortgages rates are likely inevitable since banks are facing higher borrowing costs on the bond market. Banks tap the bond market to finance mortgages because they lend out more money than they attract through deposits.
"We don't have a fully-matched book and I would guess that none of the Canadian banks have a fully-matched book in terms of deposits matching loans," said Joan Dal Bianco, vice-president of real estate secured lending for TD Canada Trust.
While mortgage rates rose slightly last week, that move was insufficient to offset the bank's higher costs because bond yields have climbed higher since that time. "And unfortunately, we're now having to cover that gap, or at least close it a little bit," Dal Bianco said.
When asked if consumers should expect even more mortgage rate increases, she replied: "I think we're going to see, over the next year, lots of changes as the economy starts showing positive signs."
The recent spike in bond yields is a global phenomenon and the increase in Canadian yields has actually been milder compared to other countries, said Doug Porter, deputy chief economist at BMO Capital Markets.
The main reason that yields are rising is because the bond market is beginning to price in the prospect of an economic recovery later this year or next year. Said Porter: "I guess that's the good news part of the story. The bad news is that there is actually a cost for the economy in terms of raising the cost of money for some borrowers."
To a lesser degree, longer-term yields are also rising because the bond market is worried about the future prospects for inflation as governments around the world issue massive amounts of debt to stimulate economic growth.
Porter, however, also noted that home sales have "perked up" a bit in the last couple of months, fuelling more consumer demand for mortgages. "That's probably played a small role in this rise in mortgage rates as well," he said.
While TD is certainly experiencing increased demand for mortgages, Dal Bianco insisted that factor played no role in the rate change. "It is strictly the bond market," she said.
Five-year, fixed-rate mortgages are traditionally the most popular option for homeowners. Nonetheless, Mark Chandler, a senior fixed income analyst RBC Capital Markets, said consumers should remember that longer-term mortgage rates are still sitting at near-historic lows.
"The hope that you can do better than that - or even maintain that for an extended period of time - that may be hoping for a little too much, really."
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