In the wake of the newly tightened mortgage regulations, a couple of big banks are raising their interest rates -- and others may be set to follow. 

Cheryl Ficker, a spokeswoman for TD Bank, said that the lender raised its special rate offer for a four-year fixed mortgage by five basis points (a basis point being one hundredth of one per cent) to 2.44 per cent and for a five-year fixed mortgage by 10 basis points to 2.69 per cent. The changes affect all amortization periods, Ficker said.

Meanwhile, Royal Bank of Canada (RBC) is raising its special offer for a five-year fixed rate mortgage to 2.94 per cent, up from 2.64 per cent. Their four-year fixed rate mortgage is going up to 2.79 per cent and the three-year fixed rate mortgage is going up to 2.69 per cent. Fixed rate mortgages with an amortization period longer than 25 years will receive a fixed rate that is 10 basis points higher than for those with an amortization of 25 years or less.

"Based on current conditions, our rates reflect the right balance between our clients' expectations and our costs of funding mortgages,'' Mary Ellen Brown, Royal Bank's senior vice-president of home equity financing, said in a statement.

The increase in fixed interest rates by TD and RBC follows another move by TD earlier this month to raise the interest rate it charges customers with variable rate mortgages. The TD Mortgage Prime rate rose to 2.85 per cent from 2.7 per cent, the first move in more than a year.

But why are banks raising their interest rates, when the Bank of Canada's overnight rate hasn't budged? Aren't interest rates tied to the prime rate?

Yes. Kindof. Variable interest rates are linked to the overnight rate because that sets how much it costs banks to finance short-term loans; when the overnight rate goes down, interest rates go down (as in recent history), and when it goes up, interest rates on variable rate mortgages rise as well. But fixed interest rates are tied to bond yields. When bond prices increase, bond yields decrease -- and vice versa -- and typically the interest rates on fixed rate mortgages increase and decrease along with bond yields. Fixed rate mortgages earn banks a certain amount of money from the spread between what they pay to finance your loan (the five-year Government of Canada benchmark bond yield) and what you pay them in interest. Whenever their borrowing costs rise, as it does when the bond yields rise, they pass the increase along to customers who take out a new mortgage. Currently, bond markets are down, bond yields are up; in fact, the five-year Government of Canada bond yield, which is used as a benchmark for mortgages, jumped 21 basis points to 0.96 per cent.

But the bond market fluctuates frequently; the recent rising rates are also a reaction to the new mortgage rules that specifically affect lenders and how much capital they have to have against low-ratio mortgages. Before the latest announcement, mortgage insurers had assumed a lot of that risk but now it has to be assumed by banks, which means that mortgages are going to be more expensive for them to finance. The cost is being passed on to consumers. The federal government has also launched consultations that will result in a proposal to have lenders assume some of the risk s that is currently shouldered by mortgage insurers for high-risk mortgage in the event of mortgage default. If the lenders have to take on more risk, the cost of lending will go up, and presumably, so too will the cost to consumers.

Mortgage brokers in particular have been concerned that latest mortgage rule changes introduced by Ottawa would make it harder for non-bank lenders to operate and could see Canadians pay higher interest rates.

There's another footnote to this, and that is the fact that according to the new mortgage rules, all insured mortgages will have to qualify at the five-year fixed mortgage rate -- which, for TD and RBC, just got higher. This impacts the affordability of homebuyers, especially those who are entering the housing market and don’t have the sale of a home to assist with their down payment.

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