RBC, Scotiabank lift benchmark mortgage rate to 6.1%

BY JOHN GREENWOOD AND ERIC LAM, CALGARY HERALD, APRIL 14, 2010, 8:04 AM

Many homeowners face increased costs as interest rates have begun what is expected to be a series of hikes.Photograph by: Archive, Calgary HeraldRoyal Bank of Canada and Bank of Nova Scotia have hiked residential mortgage rates for the second time in as many months, likely sparking another round of increases from other banks at the onset of what is expected to be one of the busiest homebuying seasons in recent years.

As of today, RBC and Scotiabank's five-year closed fixed-rate home loans will carry an interest rate of 6.1 per cent, the highest since November. Those same mortgage products carried a rate of 5.25 per cent a little more than two weeks ago.The 25-basis-point hike, announced by RBC and Scotiabank on Tuesday, comes fast on the heels of a 65-basis-point hike by the big banks late last month. It also comes as expectations rise the Bank of Canada will raise its key interest rate earlier than previously thought.Eric Lascelles, chief economics and rates strategist at Toronto-Dominion Bank's TD Securities unit, said investors are now factoring in a 50 per cent probability that central bank governor Mark Carney will raise interest rates on June 1. Carney has pledged to keep the central bank's benchmark rate unchanged through June, "conditional" on the outlook for inflation.The first round of mortgage rate hikes kicked off on March 29, as RBC, TD and Laurentian Bank announced the cost of their mortgage offerings would rise between 40 and 60 basis points.

RBC was the first to announce on that day as well.A day later, Scotiabank, Canadian Imperial Bank of Commerce and National Bank of Canada did the same.The banks say they are raising their rates because their own cost of funding is going up as investors demand higher yields.Canada's real estate market has been booming since the economy emerged from recession last year as consumers take advantage of some of the most favourable mortgage rates in decades.

Homebuyers are facing hurdles on other fronts as well, with more stringent mortgage lending rules set to take effect on April 19 and the looming introduction of the harmonized sales tax in Ontario and British Columbia.Many homebuyers are expected to try to rush to make their purchases ahead of the changes to keep their costs down.

"Mortgages are tied to the bank's funding costs, which change from day to day," said Gillian McArdle, a spokeswoman for RBC."Our long-term funding costs have gone up considerably since mid-December and it is now necessary for us to increase . . . fixed-rate mortgages."

© Copyright (c) The Calgary Herald

Rational Thought Not a Factor in Home Purchases

By The Canadian Press

Referencing RBC Study.

TORONTO - Recent first-time homebuyers say they felt pressure to enter the market as they contended with jitters about rising home prices and higher mortgage rates.

The Bank of Montreal says as many as one-third of respondents in a homebuyers survey believe their expectation that housing prices would increase, and interest rates would soar, left an impression on their decision to make a purchase in the short term.

"There's definitely a sense of urgency among home buyers," said Lynne Kilpatrick, senior vice-president of personal banking at BMO.

"While we encourage Canadians to pursue their home ownership dreams we recognize it's easy to get caught up in the emotions of the purchase and this can lead to stretching one's budget too thin."

The results come as Royal Bank released its own homeownership survey on Wednesday which showed that a majority of Canadians expect to see higher mortgage rates over the next year.
RBC's annual homeownership survey said 64 per cent of Canadians expect high rates, with about the same number of mortgage holders concerned about higher rates.

Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning this summer to fight inflationary pressures in the economy.

With many Canadians taking on larger and larger mortgage debt in expensive markets across the country, higher rates could create financial problems for some homeowners.

In the Royal Bank survey, three-quarters, or 73 per cent of homeowners, feel strongly that homebuyers need to think ahead to ensure they will still be able to make their mortgage payment if rates rise.

The bank says six-in-10 mortgage holders say they have taken advantage of current low interest rates to pay more principal on their loans.

Eighteen per cent of homeowners say they've made a lump sum payment on their mortgage and 16 per cent have doubled their payment to reduce their principal.

While 84 per cent of mortgage holders believe they are doing an excellent or good job of paying down their mortgage, 49 per cent say their mortgage is larger than they thought it would be at this stage in their life.

Marcia Moffat, RBC's head of home equity financing, says the best advice for homeowners is to review their mortgage holdings with a financial adviser to position themselves for any changes.
BMO's senior economist Sal Guatieri added that a cooler housing market is "just around the corner."

Recommended Reading

I recommend you read this and heed the implicit warning.

http://americacanada.blogspot.com/2010/03/country-of-fiscal-prudence.html

The idea that Canadians are fiscally prudent is a farce to anyone in-the-know. Most Canadians live paycheque to paycheque, have no savings, overuse their credit cards and HELOCs and are overleveraged on their real estate assets. The collective 'we are better than the US' mentality is a joke since the average Canadian's personal balance sheet looks just like their American cousin's balance sheet from 3 years ago.

The only thing fiscally prudent about Canada is that our banking system was never 'transformed' to the US / European model back in the 90s, with no small protest from the banks. Because of the high reserve ratios that the banks are required to maintain and with no small help of taxpayer backed mortgage loan guarantees via CMHC, it is not surprising that Canadian banks are phenomenally profitable. Mind you, in a credit contraction, bank earnings will be far from stellar.

In a related note - Canadians need to save more - according to David Dodge

Canadians need to save between 10 per cent and 21 per cent of their pretax incomes each year – if they save consistently for 35 years – to have comfortable retirement incomes, according to a new report by former Bank of Canada governor David Dodge.

The report says many Canadians are unaware of the high savings levels they need for their retirement years, and may believe they are saving adequately when they are not.

The report, co-authored by Alexandre Laurin and Colin Busby and published by the C.D. Howe Institute, calculates various savings scenarios based on assumptions that Canadians aim to have annual retirement incomes between 50 per cent and 70 per cent of their preretirement incomes.

“Our findings provide Canadians with a ‘reality check' about the saving rates required to meet their retirement goals,” Mr. Dodge said in a release Thursday.

A Meaty Read

The Bank of Canada produces some great analysis that I read from time to time. This paper was quite interesting.

A quote:

From an aggregate perspective there are a number of reasons to think that house prices

could ináuence consumption decisions in Canada. First, residential structures and land

account for a large share of Canadian household sector wealth. Sixty eight per cent of

Canadian households own a home and for many it represents their largest asset. Second,

house price growth is associated with higher household borrowing. The positive correlation

between consumption and house prices may be related to housingís role as collateral. Between

2000 and 2007 the real price of existing homes increased by 52 per cent. At the same time,

the ratio of household debt to GDP rose dramatically from 58 per cent in 2000 to 76 percent

in 2007. By 2007 roughly 80 per cent of Canadian household debt was secured by real estate.

Great Interview

I think this is a must read interview.

http://www.itulip.com/forums/showthread.php?p=123526#post123526

Dr. Strangedebt - How I Learned to Stop Worrying and Love My HELOC

This post is brought to you by the Joneses.

Yeehaw!! I love my Home Equity Line of Credit - HELOC.

On the path to financial self destruction, I use my HELOC to buy cars, cool gadgets, vacations, consolidate credit card debt, etc. You name it, and I've spent borrowed money on it.

My friends all think I make $150,000 per year but I only make $50,000 but I'm not going to tell them. I'm living the high life, drinking Hennessey, weekends in Vegas, new car every couple years. I'm going to keep doing it too until I collapse under the wieght of all the debt and declare bankruptcy or I'm forced to sell my home and pay off my debts. Every time I go to the bank, they offer me more money and my rates keep going down so it frees me up to do more cool stuff with money I don't have. My house is making me rich because I can just keep getting more money because my house went up in value. I bought my house for $300,000 a few years ago, had a $250,000 mortgage, and now the house is worth $600,000 and I have a $480,000 HELOC. I'm lovin' it. I just keep making those interest only payments of $1500 per month and its all good.

Strange thing happened though, I went into the bank last week to increase my HELOC because my 2007 Lexus RX is getting a little old now and I really want a new one so I need a little bit of money ($25,000) to pay the difference between the trade in and the new car but the mortgage rep at the bank told me that there was no more money and that they wouldn't increase my HELOC - the nerve. I was pissed because I work hard and I deserve that new car. I told her that I was going to take my business elsewhere if she didn't find a way to do it. She laughed at me and wished me luck. I thought to myself 'that was a little strange - that's never happened before' and I went to another bank. I couldn't get an appointment for like a week and today when I went there, they laughed at me too.

I'm starting to get concerned because I can't put up with driving this old clunker around for much longer. Any advice for this poor soul!?