Mortgage Rate Games

Mortgage Interest RatesSince last week, four of Canada’s ‘Big Six’ banks have raised their posted mortgage rates: TD Canada Trust by 45 bps (from 5.14% to 5.59%) and the other three by 10-30 bps. These rates aren’t ‘real’ in the sense that they are typically about 2% higher than the actual 5 year fixed rate that you can negotiate – but that doesn’t mean they aren’t important.

Since January 1st of this year, homebuyers have been required to qualify for mortgages based on the Bank of Canada’s “Mortgage Qualification Rate” — and this rate is calculated by averaging the posted rates of the Big Six banks. What is unnerving  about this is that the affordability lever is now in the hands of the Big Six banks, who can alter their posted rates on a whim and are not in any way accountable for the rates they choose.

A quirk of the new mortgage qualification rules is that buyers renewing their mortgages do not need to qualify at the Mortgage Qualification Rate. This gives the banks a huge incentive to hike up their posted rates (while leaving their real rates unchanged) so that buyers will have a harder time switching to another bank when their mortgage comes up for renewal. Perhaps TD Canada Trust’s huge increase in their posted rates was motivated at least in part by this consideration.

Whatever the motivations behind the latest increases in posted rates, the resultant reduction in affordability will almost certainly impact the market in the same way as any real interest rate increase would. While it seems likely that interest rates will be going up slowly this year because of increases in bond rates, it seems crazy that the banks have the power to impact the market by making large changes in their posted rates for their own purposes.

Let’s hope that we don’t experience an artificially induced downturn …