Canada’s mortgage party has come to an abrupt halt.
The bonanza of dirt-cheap mortgages offered by some of the country’s biggest lenders in recent weeks has been shut down sooner than expected, as banks pull their offers in the face of higher funding costs and concerns over dwindling profit margins.
On Wednesday, Toronto-Dominion Bank (TD-T79.150.060.08%) pulled discount mortgage rates that were supposed to be available until the end of the month. Royal Bank of Canada (RY-T53.87-0.06-0.11%) did the same on Tuesday.
RBC and TD were both offering four-year fixed-rate mortgages with a 30-year-amortization at 2.99 per cent, and had announced plans to keep those rates in place until the end of the month.
The offers were in response to Bank of Montreal (BMO-T58.620.020.03%) offering five-year fixed-rate mortgages over 25 years at 2.99 per cent, which observers said is the lowest in recent memory. Though BMO’s move was a two-week offer that was eventually halted, it led RBC and TD to match the rival bank with extended offers to avoid losing market share.
Hints that an economic recovery is taking hold in the United States are putting upward pressure on rates. A slight increase in bond yields this month has forced RBC and TD to pull their mortgage offers weeks ahead of schedule, an indication of just how slim lending margins are for banks in the current environment. Benchmark five-year Government of Canada bond yields have gone up 17 basis points since the start of February.
“The rates coming down were in response to a very aggressive move by a competitor and a need for us to defend our client base, and to defend our business. We didn’t lead it there, but we felt compelled to follow,” David McKay, group head of Canadian banking at RBC, said in an interview Wednesday.
“When that market attacker corrected and raised their rates, it enabled us to say funding costs are going up, we’re not making enough spread at this rate … and we need to raise pricing because the cost of funds is going up.”
In an improving economy, expectations of inflation taking hold gradually push up bond yields and lending rates. Government of Canada five-year bond yields reached a two-month high of 1.416 per cent on Wednesday.
“Rates can go up and down, depending on conditions. The new rates reflect rising bond yields and the subsequent increase in the cost of funds,” TD spokesman Mohammed Nakhooda said.
In response, TD and RBC both increased their four-year, fixed-rate mortgages to 3.39 per cent, an increase of 40 basis points. BMO has also raised its rates to similar levels.
“We have seen some modest backup in Canadian bond yields in recent weeks, amid growing optimism on the global economic outlook – and in particular an improving U.S. outlook,” said Doug Porter, deputy chief economist at BMO. “In turn, this has put some upward pressure on borrowing costs.”
The banks, which will begin reporting quarterly earnings at the end of the month, aren’t saying whether the deep discounts on mortgages led to a boom in new business. However, anecdotal evidence gathered from inside the mortgage community Wednesday suggested a flurry of activity has taken place since mid-January.
The lower rates came at a time when Ottawa is trying to warn consumers against taking on too much debt, worried that household debt levels across the country are rising too quickly. Sources indicated last week that officials in Ottawa were not happy with the price war the banks were waging on mortgages, since it potentially encouraged people to borrow more.
Frank Techar, head of personal and commercial banking in Canada for BMO. said BMO began offering the 2.99-per-cent rate as a way to promote its 25-year mortgages, rather than 30-year amortizations. “We went to 2.99 per cent to draw attention to the benefits of having a mortgage with a maximum amortization of 25 years,” he said.
The Globe and Mail, February 9, 2012.