Mortgage rates in Canada are heading higher as fears of inflation resonate through the bond market while U.S. legislators move towards agreement on a $700-billion US bailout plan for Wall Street banks.
TD Canada Trust and Bank of Montreal said late Thursday they have raised mortgage rates by more than a third of a percentage point on three-, four- and five-year loans.
The changes reflect the rising cost of borrowing in the bond market, an inflation-sensitive financial marketplace where banks finance their mortgage lending.
Effective Friday, a five-year mortgage at both banks increases by .35 of a percentage point to 7.2 per cent, while a three-year closed term rises by the same amount to 7.05 per cent.
A one-year closed mortgage loan at TD Canada Trust falls by .3 of a percentage point to 6.35 per cent.
The changes suggest bond markets are worried about the future inflationary pressures from the proposed $700-billion U.S. government bailout of Wall Street banks, said TD Bank chief economist Don Drummond.
"We always did figure that adding $700 billion to the deficit of the United States would probably cause something like a 25 basis point [quarter point] increase in the longer-term interest rates and that seems to have already happened," said Drummond.
"[The bailout] does increase the risk to bonds. In just plain good old demand and supply that means there has to be an awful lot of bond issuance and there's a limited supply of people that want to buy them so it's natural that the price goes up," he added.
The interest rates on mortgages and other short-term borrowing are set based on the price of bonds. With lower demand for bonds and fears of inflation, rates have to rise to lure investors willing to part with their money.
Other interest rates in the economy — from consumer and car loans to mortgage rates tied to the prime rate — are affected by the Bank of Canada trend-setting rate, which is expected to fall or remain stable over the next few months at least.
On Thursday, U.S. congressional Republicans and Democrats reported agreement in principle on a bailout of the financial industry. They said they would present it to the Bush administration in hopes of a vote within days.
The bailout is expected to push up inflation and force the U.S. Federal Reserve Board to raise rates in the future.
Thursday's mortgage rate increases also come a day after the Merrill Lynch brokerage warned that Canadian households are so indebted that it's only a matter of time before the housing market turns down, as has already happened in the United States.
The Merrill Lynch Canada report by economists David Wolf and Carolyn Kwan acknowledged that the analysis is more pessimistic than the prevailing view. However, there are parallels with what happened in the United States in early-to-mid 2006 when housing prices started going down.
"There are parallels here and there is risk here that's perhaps not being properly acknowledged," said Wolf. "We may have started from a better place but Canadians are over time starting to borrow as much as Americans and the British."
© The Canadian Press, 2008
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