TD Bank increased it’s posted rates and RBC will be doing so today.
This increase, from 5.14% to 5.59% at TD, is the “biggest move in years.” The first reason for a lender to increase their rates would be when the bond yields increase. We have seen a slight increase but not that much, and definitely not enough to increase the discounted rates too. Generally, when the bond market changes, the discounted rates will change. Discounted rates are the rates that clients actually see on their mortgage commitments. But actual discounted interest rates have not changed… so what exactly is happening? Banks benefit from higher Posted Rates, and here is why: #1. Posted rates are being used to calculate the bank’s mortgage penalty. Banks use the posted rate for their penalty calculations. The higher the posted rate, the higher someone’s potential penalty is when they break their mortgage prior to the end of the term. I’m referring to the Interest Rate Differential ( IRD) for the fixed rate mortgages. Needless to say, this is definitely not in the clients’ best interests. If you are in a variable rate mortgage or with a mainline lender, this does not concern you since the payout calculations are very different (and lower).
#2. It makes clients think rates are higher than they are. That is specifically true when renewal letters go out, and unfortunately, clients sign before shopping around because they’ve heard on the news that rates are higher. It is sad but true that lenders are offering discount rates to different sets of customers, based on their willingness to pay.
#3. Eventually, if the majority of Banks raise their posted rates, the benchmark rate will also increase. The benchmark rate is a rate that lenders are required to use to qualify mortgage borrowers in Canada with less than 20% down payment. It is also known as the stress test. As of today, it is still 5.14%. So even though TD posted rate is 5.59%, we’re still using the benchmark rate of 5.14% to qualify borrowers. And that is still true, as of today, April 30th. When the actual benchmark rate increases, that would translate to approximately less than 5% decrease in affordability for some borrowers. And again, the Benchmark Rate used for the Stress Test have not changed. However, we do expect the other Big Banks to increase their posted rates, which eventually will trigger an increase in the Bank of Canada Benchmark rate. If you have any questions, feel free to reach out at 647-893-2535 or [email protected] Sign Up Here for Monthly Mortgage Updates
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