Mortgage providers across the country have been busy raising rates over the past week, and it could continue next week as bond yields continue to rise.

On Thursday, the Government of Canada 5-year bond yield briefly surged to an intra-day high above 4.41%. It pulled back slightly, but remains at a 16-year high.

As a result, mortgage providers—including RBC and TD Bank—have been hiking fixed mortgage rates across all terms by up to 30 basis points (0.30%).

“Higher fixed mortgage rates again next week if this keeps up,” tweeted Ron Butler of Butler Mortgage.

The role of risk “spreads”

In a note to clients, TMG The Mortgage Group broker Ryan Sims touched on the intricacies of mortgage rate pricing, including both the influence of bond yields as well as the spread banks apply to manage risk.

While lower interest rates are desirable, they often coincide with economic downturns—and occasionally an economic “train wreck,” as was seen during the 2008 Financial Crisi—resulting in banks increasing spreads to offset perceived risks.

“I would think that if we were to see any economic wobbles over the next 60 to 180 days, we would see bond yield start to drop,” he wrote. “[But] if we see bond yields drop quickly, I would expect the [higher spreads] to start to eat away at any—or all—of the savings.”

He pointed to March 2020 as an example. At that time, the Bank of Canada drastically cut its target overnight rate, yet 5-year fixed mortgage rates actually went up based on the risk at the time.

Federal government increasing CMB program by 50%

The Canadian government has announced a significant increase in the annual limit for Canada Mortgage Bonds from $40 billion to $60 billion, unlocking $20 billion in new financing to facilitate the construction of an additional 30,000 rental apartments per year.

This initiative is part of a comprehensive strategy to address the surging housing costs and meet the growing demand for rental housing. The additional financing is designated for multi-unit rental projects, including apartment buildings, student housing and senior residences.

However, this expansion of the mortgage-bond program marks a temporary reversal of the government’s earlier proposal to phase out the program, leading to some market uncertainties.

Despite the program’s AAA-rating and government guarantee, the inconsistent signalling around its continuation and size has raised concerns among market participants.

RBC: Government’s GST measure no “silver bullet”

Earlier this month the federal government announced the elimination of GST on new rental construction in an effort to encourage developers to pursue purpose-built rental apartment projects.

While the move is expected to “improve the financial viability” of such construction projects, a report from RBC Economics said that it “won’t be a silver bullet” insofar as delivering new supply to the rental market.

This is due to the “severe deficit position” the rental market finds itself in, as well as the fact it will take time to get such projects off the ground and complete, noted report author Rachel Battaglia.

“More policy action—at all levels of government—will be needed to really move the needle on rental supply and affect rent,” she wrote. “This includes modernizing zoning by-laws to accommodate high density development, streamline the permitting prices for new construction, and ensure other fees, taxes, and policies are in line with the broader goal of expanding the rental housing stock in Canada.”

B.C. government unveils measures to speed up homebuilding

In an effort to speed up the pace of homebuilding in British Columbia, the provincial government has unveiled two new initiatives, including the Single Housing Application Service (SHAS) and the Home Suite Home guide.

SHAS aims to streamline permitting for builders, potentially cutting timelines by two months, while the guide assists homeowners in developing secondary suites. A pilot program, launching in spring 2024, will offer forgivable loans up to $40,000 for below-market rate secondary suites.

“We are going at this problem from all different directions, because that’s what it requires,” Premier David Eby said. “People in our province deserve a decent place to live they can actually afford to rent or buy, but a chronic housing shortage and long permit approval times are frustrating that achievable goal.”

The initiatives have garnered industry support but also faced criticism regarding their substance and potential bureaucracy. These measures, part of the Homes for People action plan, prioritize diverse housing solutions, including social and Indigenous housing, and aim to leverage approximately 228,700 units eligible for conversion into secondary suites across the province.

RBC’s $13B acquisition of HSBC approved by Competition Bureau

The Royal Bank of Canada (RBC) has received approval from the country’s Competition Bureau for its $13.5-billion acquisition of HSBC’s Canadian unit.

The deal, marking RBC’s largest acquisition, will see the bank, already Canada’s largest with 1,200 branches and $1.8 trillion in assets, acquire HSBC Canada’s 130 branches and $134 billion in assets.

The Competition Bureau did say the deal would “result in a loss of rivalry between Canada’s largest and seventh-largest banks.”

The deal, while still subject to further regulatory approvals, is expected to close by the end of 2023. The implications of the deal on HSBC’s mortgage products remain uncertain. HSBC has consistently offered market-leading pricing among the big banks for select mortgage terms.

When the acquisition was announced in November 2022, RBC CEO Dave McKay had called it a “unique and once-in-a-generation opportunity,” adding it would position RBC as the “bank of choice for commercial clients with international needs, newcomers to Canada and affluent clients who need global banking and wealth management capabilities.”

This article was written for Canadian Mortgage Trends by:

Fixed mortgage rates could surge higher in the coming week after Government of Canada bond yields—which lead fixed mortgage rates—shot up to a 16-year-high.

Rate-watchers say mortgage providers could hike rates by anywhere from 20 to 30 basis points (0.20% to 0.30%).

“Fixed rates should be up 20 bps on this news, however if the bond yield keeps climbing, more is on the table,” Ryan Sims, a TMG The Mortgage Group broker and former investment banker, told CMT.

With most mortgage rates now above 6%, Sims believes 5-handle rates (those in the 5% range) could largely be gone by next week, aside from some special rate offers.

Ron Butler of Butler Mortgage tweeted that he expects mortgage rate increases ranging from 25 to 30 bps. And, since lenders don’t generally adjust their rates all at once, he added, “it will take until the end of next week until all the increases are published.”

Yields were up to levels not seen since 2007 following this week’s higher-than-expected inflation reading in Canada and comments from the U.S. Federal Reserve, both of which suggested that interest rates could remain elevated for longer than anticipated.

The bigger question: when are the rate cuts expected?

While markets are currently pricing in slight odds of two more rate hikes before the end of the year, most experts believe the central bank has just one more quarter-point left in its tank. And all of the big bank forecasts continue to believe the Bank is now done with its rate-hike cycle.

But more importantly, says mortgage broker Dave Larock, is the timing of the Bank’s first expected rate cuts.

Markets are now pushing back expectations for the first rate cuts to the latter half of 2024.

“To me, the more the more powerful question to be asking now is when are we going to see cuts? Because one more quarter-point hike, incrementally on a proportional basis, is pretty small,” he told CMT. “The question is how long are they going to keep the tourniquet this tight?”

Historically, he said the gap between the Bank of Canada’s last rate hike and its first rate cut is roughly 10 months.

“That’s one reason we want to know if the BoC is finished hiking, because we want to know if the clock started on the gap period between its last hike and its first cut,” he said. However, he noted that 10 months is not a rule and can vary drastically between rate-hike cycles.

The impact of higher interest costs

Growing expectations of a “higher for longer” interest rate environment will impact both variable-rate borrowers and those purchasing or renewing existing mortgages at these elevated rates.

Survey results released this week by Mortgage Professionals Canada found that 65% of mortgage holders expect to renew their mortgage in the next three years, with more than two thirds (69%) saying they are anxious about the thought of renewing at a higher mortgage rate.

The rate hikes to date have meant debt-servicing costs are rising to record levels. The monthly mortgage payment required to purchase the typical home has now risen to $3,600 a month, according to Ben Rabidoux of Edge Realty Analytics. That’s a 21% increase from a year ago and up 80% over the past two years.

Meanwhile, a recent report from Oxford Economics found that the interest-only debt-service ratio rose to 9.9% in the second quarter, its highest level since 2007.

“Our modelling shows that household interest payments as a share of disposable income will rise to 10.3% in the coming months,” the report noted. “We expect highly indebted households will cut spending as they deleverage and pay down debt, which should put the principal portion of the debt service ratio on a downward trajectory.”

The latest big bank rate forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.

This article was written for Canadian Mortgage Trends by:

CIBC reports that its mortgage clients are so far managing to absorb the payment shocks as their mortgages come up for renewal at higher rates.

The bank made the comments during its third-quarter earnings call, where Chief Risk Officer Frank Guse confirmed the bank has already navigated a substantial number of mortgage renewals at higher interest rates, totalling approximately $25 billion year-to-date, impacting close to 100,000 clients.

“We are monitoring that cohort very, very closely from a delinquency rate perspective,” he said, with specific attention being paid to performance over the past six to eight months.

“Those clients are performing broadly in line with what we would have seen in 2019,” he noted. “So, there are no areas of concern that we are seeing so far emerging because clients are absorbing higher payments at renewal.”

The bank confirmed that another $37 billion worth of mortgages will be renewing over the next 12 months.

However, Guse said the bank is confident that clients will continue to be able to handle the rate increases and reiterated that delinquencies still remain low.

“We do feel comfortable…that those payment shocks—even though they are high, and they will certainly go higher over time—are manageable for those clients,” he said. “Our overall late-stage delinquencies remain low, especially when compared with pre-pandemic levels.”

Closely monitoring variable-rate clients

Guse added that the bank is “very, very closely” monitoring its variable-rate clients, which currently comprise about a third of the bank’s Canadian residential mortgage portfolio, down from 37% in Q1.

“We know their renewal schedules. We look very closely into what payment shocks are, again, under assumptions of where interest rates are over time,” he said, adding that, so far, this mortgage segment continues to display “strong credit quality and performance.”

As a result of the Bank of Canada’s latest interest rate hikes in June and July, CIBC said $50 billion worth of variable-rate mortgages have reached their trigger point, meaning the borrowers’ payments are only covering the interest portion. That’s up from $44 billion worth in the second quarter.

But Guse says the bank is continuing to reach out to clients whose mortgages are currently negative-amortizing, which is yielding “good responses.” To date, he said about 8,000 clients have increased their monthly payments and more than 1,000 made lump-sum payments.

“We will continue to work closely with our clients through this high interest rate environment and other market developments,” he said.

A quarter (25%) of CIBC’s residential mortgage portfolio now has an effective amortization of 35 years or longer, down slightly from a peak of 27% in Q1.

Remaining amortizations for CIBC residential mortgages

Dodig addresses recent press on CIBC’s underwriting practices

During the conference call, one analyst asked President and CEO Victor Dodig for his take on information that was leaked to the Globe and Mail concerning remediation orders the bank faced from the Office of the Superintendent of Financial Institutions (OSFI).

The Globe had cited two unnamed sources who said CIBC was put under remediation orders for more than a year after an audit of its mortgage portfolio unearthed debt-ratio breaches that reportedly involved thousands of clients with home equity lines of credit. When combined with their mortgages, the total credit available was reportedly in breach of regulatory guidelines.

“What I will say about articles like that, it’s disappointing to see when things are being reported publicly that are presented in a way that simply does not reflect the way we actually operate,” Dodig said.

And while he said he couldn’t comment specifically on regulatory matters, Dodig did say, “our regulators play an incredibly important role in ensuring strength and stability in the financial system in Canada, and I think they’ve done that over a century and a half and they do it well.”

“I can tell you that we maintain an ongoing transparent engagement with all of our regulators in all of the jurisdictions that we operate and with our board,” he added. “We’ve also got effective controls to ensure compliance with supervisory expectations, and we continue to manage all of our businesses including our mortgage business prudently with a client focus.”

CIBC earnings highlights

Q3 net income (adjusted): $1.47 billion (-15% Y/Y)
Earnings per share: $1.52

Conference Call

• “The Canadian consumer book is holding up very strong,” said Frank Guse, Chief Risk Officer. “We see impaired losses normalizing, but we see them normalizing well within our expectations…if you look at delinquency rates, if you look at impairment rates and so on, we are pleased with that resilience because it is performing better than our expectations.”
• “NIM was up 10 basis points sequentially, including help from nonrecurring items,” said Hratch Panossian, Chief Financial Officer. “Excluding this, the key driver was deposit margin expansion in the quarter, supported by higher rates which more than offset moderating pressure on mortgage margins.”
• “We saw a build in performing allowances this quarter, reflecting a prudent outlook based on the macroeconomic environment,” said Guse. “Our impaired loans continue to normalize and remain within expectations.”
• “After nearly 18 months of rate hikes, our forecast expects servicing pressures of higher interest rates and rising unemployment,” Guse added.

Source: CIBC Q3 conference call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

Featured image by Igor Golovniov/SOPA Images/LightRocket via Getty Images

This article was written for Canadian Mortgage Trends by:

Today the bank of Canada held its policy interest rate at 5% citing slowed economic growth due to a weakening in consumption growth, decline in housing activity, and the impact of wild fires across the country.

See the full Bank of Canada post here:

Bank of Canada maintains policy rate, continues quantitative tightening

How does this affect you?  Call or message me and lets have a chat!

(Scroll up for contact info)