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Mortgage rates begin to rise
Kristine Owram The Canadian Press
Mortgage rates in Canada are heading higher as fears of inflation resonate through the bond market while U.S. legislators struggle toward agreement on a $700 billion US bailout plan for Wall Street banks.
TD Canada Trust and Bank of Montreal said last night 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 today, a five-year mortgage at both banks increases by 0.35 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 U.S. 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.
A bailout is expected to push up inflation and force the U.S. Federal Reserve Board to raise rates in the future.
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