Mortgage rates rise amid war concerns

Friday, March 21st, 2003

Increase not likely to panic prospective home buyers, real estate professionals tell The Sun’s Joanne Blain

Joanne Blain

Canada‘s big banks began increasing mortgage rates by a quarter-point across the board Thursday as uncertainty about the war in Iraq made the bond market nervous.

But even the second uptick in rates this month likely won’t cause prospective buyers to panic, real estate professionals predict.

At most banks, the five-year mortgage-lending rate moves to 6.85 per cent, while the rate on a one-year closed term is 5.35 per cent. A six-month open mortgage carries a term of 6.6 per cent.

The start of the U.S.-led war on Iraq — and a recent shift of investor money towards stocks — has caused interest rates to rise in the bond market, where banks borrow money to finance their mortgage lending.

With uncertainties about the war, oil prices and the global economy, investors are demanding higher rates before they buy bonds from corporate and government issuers in financial markets.

The rate hike may encourage real-estate shoppers with pre-approved mortgages at lower rates “to kind of get off the fence,” said Tom Gradecak, an agent with Re/Max Crest Realty in Vancouver.

But he doesn’t think the second quarter-point rate hike in a month — the last was a March 4 increase in prime lending rates — will drive many prospective buyers out of the market.

“I don’t see it as being a big panic in the streets. I think the rates are still pretty low,” said Gradecak.

“It just depends on the price range. If you get a five-per-cent-down, first-time buyer, you may lose some of those.”

Gradecak, who specializes in West Side Vancouver houses and townhouses, said he wouldn’t expect to see any substantial impact on the pool of potential buyers until five-year mortgage rates climb over seven per cent.

For those deciding between a variable and a fixed-rate mortgage, Thursday’s hike may nudge them to pick the sure thing, said Frank Greschner, a senior mortgage consultant for Invis Financial Group.

“A lot depends on their own comfort zone and their personal situation,” said Greschner, who has been in the business for 25 years.

“Some people are not very tolerant of any rate fluctuations at all and would prefer a five-year rate at an all-time low. That’s sort of my personal choice if I were making a decision right now as well.”

Some buyers will continue to choose a variable rate “because historically, floating rates have been cheaper,” Greschner said. But he suggests that people who are on a budget that would be thrown out of whack by another rate hike should “take the five-year term and don’t worry about the rate.”

As for what will happen to rates in the future, “no one knows for sure [but] I think there’s a much better chance they’re going to go up than down.”

In its annual report, released Thursday, the Bank of Canada hinted the same thing.

The bank admitted that inflation rose faster than expected in the last months of 2002. Although it hit 4.5 per cent in January, the bank remains confident it will slip back to about two per cent within a year.

But that might require more interest rate hikes, the report indicated.

An increase in the prime rate is more likely to affect short-term and variable rates, said Greschner, while long-term rates are tied more closely to the bond market.

On Thursday, TD Bank led the mortgage hikes by raising rates by a quarter of a percentage across the board — from its six-month convertible mortgage to its 10-year closed mortgage.

For example, its five-year “best rate” mortgage rose to 5.65 per cent, effective Friday.

CIBC followed TD’s lead by raising mortgage rates by a quarter point. Its five-year closed mortgage is now at 6.85 per cent.

“There’s a fair amount of uncertainty out there as you can imagine and bond rates for the last week at least have been increasing quite dramatically,” said David Fallon, associate vice-president of lending products with TD Canada Trust.

“We’ve held off, frankly, for as long as we could because of the uncertainty,” he said. “Given [Wednesday’s] events overseas, we didn’t know how the markets would react so we waited as long as we could but it was just an unsustainable spread.”

As well, more money is going into the stock market from the bond market as some investors bet the Iraq conflict will be a short war. That’s also raising interest rates in the bond market to attract investors, Fallon said.

“At the end of the day, we have to piggyback the bond rates.”

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Rates for many mortgage categories are rising effective today, generally on the order of a quarter of a percentage point. Some new fiexed rates at two major banks, and the increase:

Royal BMO 6-month open 6.60%/+0.65% 6.60%/+0.25% 1-YEAR CLOSED 5.10%/+0.20 5.35%/+0.25% 4-YEAR CLOSED 6.40%/+0.35% 5.55%/+0.20%

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