RBC, TD hike 5-year mortgage rates

Two of Canada's big five banks have decided to raise the rate on their posted, five-year mortgages.

Royal Bank and TD Bank announced Monday they were hiking their five-year-closed rate by 0.20 to 5.44 per cent, and their special fixed four-year closed offer by 0.50 per cent to 3.49 per cent; their posted five-year variable rate — which rises or falls along with the banks' prime lending rate — will rise 10 basis points to prime plus 0.20 percentage points.

A basis point is one-hundredth (.01) of a percentage point.

The moves follow recent sustained increases in bond market interest rates, where banks raise their funds, and comes amid continuing concerns about the ability of some Canadians to manage their high personal debt loads.

The rate hikes come after a recent race to the bottom that recently saw Royal and others push their special offer fixed rate down to 2.99 per cent. The remaining banks could soon follow RBC's move in raising rates as the big five Canadian banks often move in lockstep.

In a BMO report Friday, its economists argued that with the U.S. recovering gathering steam, central bankers on both sides of the border are becoming more comfortable with the economy and less so with historically low interest rates that in Canada are fanning the flames of the hot housing market.

The increase follows comments by Finance Minister Jim Flaherty Thursday, criticizing banks who have called on Ottawa to tighten lending and saying that’s their job.

Last week, the Canadian 10-year bond yield climbed close to a five-month high of over 2.24 per cent, a result of increased confidence by in the North American economy by investors prepared to move money out of the bond market and into stocks.

Today, Canada's 10-year bond was yielding 2.187 per cent, up from 2.171 per cent Friday. Bond yields move inversely to their prices.

Yields tend to rise each spring with the peak home-buying season.

The Bank of Canada has repeatedly raised its concerns about household debt.

The ratio of debt-to-personal disposable income is now above 150 per cent, and some economists predict it is likely to reach by late next year the 160 per cent peak experienced in the U.S. and the U.K. before their real estate corrections occurred.

TD Bank chief economist Craig Alexander has estimated more than one million Canadian households, or about 10 per cent of those that currently have debt, will have to devote 40 per cent or more of their income to making their monthly debt payments if rates rise by two-to-three points to more normal levels.

The government has already intervened three times to tighten the rules on mortgage lending and Flaherty said last week, given signs of overvaluation in Canada's property market, the government is prepared to tighten mortgage insurance rules again, if necessary.

The government has moved in the last four years to lower the maximum amortization period from 40 years to 30, raise minimum down payments to qualify for government-insured mortgages and required borrowers who want insurance to first show they can qualify for a five-year, fixed mortgage.