As banks lift mortgage rates, Ottawa moves to sidelines

Royal Bank of Canada, the country's largest mortgage lender, is raising interest rates on home loans, a move seen putting pressure on rates across the market. Canadian Press

Interest rates on new home loans are heading higher for borrowers at the country’s big banks, moves that will likely help ease policy makers’ concerns in Ottawa who have resorted to tightening lending rules to cool the market.

Royal Bank of Canada, the country’s biggest home-loan lender, said Wednesday it is increasing interest on most new mortgages by 20 basis points, a hike that follows Bank of Montreal’s own rate bump on Tuesday.

The moves, two in a series of rate hikes among big lenders recently, may help douse the country’s still-hot housing market with some cold water, something policy makers have been trying to do for the past year or so, anxious over a potential bubble forming in markets like Toronto amid historically low borrowing rates.

At RBC, the bank said its fixed five-year closed mortgage rising to 5.34 per cent and its five-year special rate to 3.89 per cent. The rate changes are effective Thursday.

Story continues below advertisement

Other rates rising 0.2 percentage points include the bank’s three- and four-year closed rate to 3.95 per cent and 4.74 per cent respectively.
On Tuesday, BMO said it will raise the interest rate on its five-year, fixed-rate mortgages to 3.79% from 3.59%.

Read more: Mortgage rates expected to rise as feds cap guarantees for lenders

The rates will likely temper demand among potential buyers, but are welcome developments among policymakers in Ottawa. Finance officials have taken steps in recent years to curb exuberant home lending, spurred on by ultra-low interest rates.

Last summer, federal Finance Minister Jim Flaherty capped insured mortgages to 25 years among other steps, a move forcing borrowers to save higher down payments.

After a lull in sales activity through the first months of this year however, lenders returned to super-low rates to entice buyers back to the market.

Flaherty went so far as to publicly chastise BMO as well as Manulife Financial in the spring for bringing back advertised rates on standard five-year mortgages that were below 3.00 per cent – the lowest commercial rates ever.

Earlier this month, Ottawa placed a limit on how much mortgage debt it would insure, forcing banks to take on more risk when lending home loans – a move that put pressure on the group to lift their rates.

Story continues below advertisement

The average sale price on an existing home – which includes the three main housing types of semi-detached, detached and high-rise units — climbed 8.4% year-over-year to $382,373 in July. The number of homes sold was 9.4 per cent higher than a year earlier when Flaherty’s new restrictions first came into force.

With RBC and BMO lifting rates, experts suggest other big lenders will likely follow suit.

“Once one bank makes a rate hike, it’s kind of a domino effect,” said Kerri Lynn McAllister at, which tracks mortgage rates.

In televised remarks on Wednesday, the minister said Ottawa had no intentions to take further action in the market place.

“We’ve watched the condo and housing market closely for the past five years and as you know, we’ve taken four steps over the course of those years to try to calm them,” the minister, speaking in Wakefield, Quebec.

“There are no plans to intervene further.”

Sponsored content