Tuesday, October 07, 2008

Bank Raises Rates on Variable Rate Mortgages

The latest victims of the growing financial crisis could be the standard discount available to consumers on variable mortgages, and home equity loans at prime.

In a move expected to be followed by other banks, all of which have been stung by higher funding costs, TD Canada Trust is raising rates on both types of loans, effective Oct. 7.

Rates on these products will rise to 5.75 per cent, a percentage point above the prime rate. Only last week, TD eliminated the discount on its variable rate mortgages, offering them at the prime rate of 4.75 per cent. During the housing boom of the past several years, consumers could often get their bank to drop the rate by half or even up to a full percentage point.

“While TD Canada Trust has endeavoured to not pass on the increases in rates to its consumers, this change reflects steadily increasing costs of funds in the current economic environment,” the bank said in a statement.

The percentage point increase raises the term interest cost on a $250,000 variable rate mortgage by $12,247.22 over five years, according to Royal Bank of Canada's online mortgage calculator. The difference is based on a 25-year amortization, a variable rate mortgage with a five-year term and bi-weekly payments. On that basis, the bi-weekly payment amount rises to $725.90 from $657.83.

The credit crisis and economic uncertainty have caused banks to stockpile their cash. That's driving up their short-term cost of borrowing from one another, and means margins on variable rate mortgage products are shrinking.

Rates on fixed-term mortgages went up last week too, as banks have passed on fewer of their savings from falling bond yields to consumers to consumers.

“The deterioration of global credit markets is beginning to squeeze the ability of even the strongest of financial institutions to raise longer-term funds, which could limit the provision of longer-term credit in Canada to businesses and households,” federal Finance Minister Jim Flaherty said in a statement Monday.

“Hopefully this isn't a permanent shift, but a short-term reaction to conditions the likes of which we really haven't seen before,” said Gary Siegle, regional manager at mortgage broker Invis.

With a discount, some customers can still get five-year, fixed-rate mortgages at 5.55 per cent, meaning a bi-weekly payment of $707.66 on a $250,000 mortgage amortized over 25 years. This means those looking for peace of mind in the current market turmoil aren't paying a premium to lock in, Mr. Siegle said.


mohican said...

The word on the street has it that over half of new mortgages were Variable Rate and that the spread on the banks borrowing costs and what the customer was paying was well into negative territory - ie - the banks are subsidizing the mortgage. We'll see later today if the rest of the banks follow.

RentingSucks said...

Does anyone think a Canadian bank failure is a possibility? We keep telling ourselves we're different but this is the a sign that Canadian banks aren't completely immune for the crisis. I thought it was going to be bad but not this bad. Stock market plus real estate crash is going to suck a LOT of money out of the system.

mohican said...

Anything is possible. The less diversified financial institutions will be hit hardest and fastest.

Regional banks / credit unions based in markets where the housing market is falling are at the highest risk.

patriotz said...

Remember Bank of BC and two Alberta banks failed in the 1980's resource/RE bust - sort of a north of 49th version of S&L.

Now there's just Canadian Western Bank which from all accounts is one of Canada's most conservative. Other banks have their exposure spread across the country or in non-bubbly Quebec.

Definitely expect credit union failures, these always happen during downturns and the victim just gets absorbed by a bigger CU.

But the 64 billion question is what would happen if a biggie like Coast Capital or Vancity got into trouble.

Ryan said...

Does this affect people with existing variable rate mortgages, or only new mortgages?

mohican said...

This only affects new mortgages.

It would be interesting to see what happens if a big Credit Union goes belly up. Big bank acquisition target is the most likely outcome.

Ryan said...

I'm a little nervous myself. My Visa is with CIBC and my chequing account is with Coast Capital. If anyone goes belly up in this thing those two are my prime picks. Maybe I should shop around for a new bank sooner rather than later.

jesse said...

"Definitely expect credit union failures, these always happen during downturns and the victim just gets absorbed by a bigger CU."

If the competency of their chief economist is any indication, it will be a big 5 bank that will take them over; I doubt the other CUs will be in any position to assume an insolvent business.

Corporate Bully said...

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I'm a commercial fisherman fighting the Royal Bank of Canada (RBC Bank) over a $100,000 loan mistake. I lost my home, fishing vessel and equipment. Help me fight this corporate bully by closing your RBC account.

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There is no monthly interest payment date on the contract.
Date of first installment payment (Principal + interest) is approximately 1 year from the signing of my contract.
Demand loan contracts signed by other fishermen around the same time showed a monthly interest payment date on their contract,(agreement).
The lending policy did change at RBC from one payment (principal + interest) per year for fishing loans to principal paid yearly with interest paid monthly. This lending practice was in place when I approached RBC.
Only problem is the loans officer was a replacement who wasn't familiar with these type of loans. She never informed me verbally or in writing about this new criteria.

Phone or e-mail:
RBC President, Gordon Nixon, Toronto (416)974-6415
RBC Vice President, Sales, Anne Lockie, Toronto (416)974-6821
RBC President, Atlantic Provinces, Greg Grice (902)421-8112 mailto:greg.grice@rbc.com
RBC Manager, Cape Breton/Eastern Nova Scotia, Jerry Rankin (902)567-8600
RBC Vice President, Atlantic Provinces, Brian Conway (902)491-4302 mailto:brian.conway@rbc.com
RBC Vice President, Halifax Region, Tammy Holland (902)421-8112 mailto:tammy.holland@rbc.com
RBC Senior Manager, Media & Public Relations, Beja Rodeck (416)974-5506 mailto:beja.rodeck@rbc.com
RBC Ombudsman, Wendy Knight, Toronto, Ontario 1-800-769-2542 mailto:ombudsman@rbc.com
Ombudsman for Banking Services & Investments, JoAnne Olafson, Toronto, 1-888-451-4519 mailto:ombudsman@obsi.ca

"Fighting the Royal Bank of Canada (RBC Bank) one customer at a time"

patriotz said...

If the competency of their chief economist is any indication, it will be a big 5 bank that will take them over

I've never head of a bank taking over a failed credit union. One, there are corporate and customer culture issues which make them unattractive as takeover targets for banks, and two the bank would be unlikely to expand market share.

As long as the big CU's are standing, they will absorb the small ones. As i have said, the question is what happens if one of the biggies gets into trouble.

Ironically, Vancity wanted to take over Bank of BC in the 80's, but was blocked by the Bennett government because of its NDP connections.

Biz said...

Can we trust Gary Siegle words? (regional manager at mortgage broker Invis)

This article is really an appropriate in this times during the wall street issues.

BizBlogged - Finance blog,finance,economics,Corporate finance,Personal finance,Investing,Marketing