grant robertson — BANKING REPORTER
From Thursday's Globe and Mail
Published Wednesday, Feb. 08, 2012 7:43PM EST
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-T79.090.260.33%) pulled discount mortgage rates that were supposed to be available until the end of the month. Royal Bank of Canada (RY-T53.930.350.65%) did the same on Tuesday.
On Wednesday, Toronto-Dominion Bank (TD-T79.090.260.33%) pulled discount mortgage rates that were supposed to be available until the end of the month. Royal Bank of Canada (RY-T53.930.350.65%) 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-T58.600.480.83%)
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.
http://www.theglobeandmail.com/globe-investor/canadian-banks-call-truce-in-easy-money-mortgage-battle/article2331673/
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