TD Ramps Up Its 5-year Posted Rate

We’re seeing government bond yields approaching seven-year highs, and now this. TD has just boosted its posted 5-year fixed a whopping 45 basis points (bps) to 5.59%.

Over the last decade, the average increase to posted 5-year fixed rates has been 24 bps. A 45-bps bump is rare, and the most in eight years.

If at least two other Big 6 banks follow TD’s lead (and they may), the mortgage qualifying rate will jump enough to shave off about 3% from a typical borrower’s buying power. That makes the government’s mortgage stress test all the more stressful and, of course, could:

  1. add downward pressure to home prices, and
  2. trap more people with their bank at renewal, to the extent they can’t qualify elsewhere.
    • By the way, OSFI’s imposition of the stress test on renewals (switches to a new lender) is easily one of the worst policy decisions in Canadian mortgage history. It’s giving banks a license to quote borrowers with higher debt ratios stupidly noncompetitive rates, despite those borrowers being otherwise qualified and having perfect repayment records for 5+ years. The banking regulator should be utterly ashamed by how much it is costing less qualified renewers.

Most of the big non-bank lenders have already boosted their best 5-year fixed rates by about 10-15 bps. But TD is the first of the Big 6 to move its posted 5-year fixed rate since January. Here’s a look at all the best bank rates as they stand currently.

Spreads Widen

On the variable side, discounts from prime rate have been stable to slightly better in recent weeks. The spread between the best 5-year fixed and variable rates is now 76 bps, its widest since December 2013. The bigger it gets, the greater your odds of winning in a variable term, other things equal.

In fact, for strong default-insured borrowers, the lowest variable rates are 2.11% (prime – 1.34%) on an effective rate basis. That is an absolute steal.

If you want to play the variable game now, you’re staring at the possibility of two more hikes by next January. That’s assuming market expectations are accurate, and they’re often not. If you’ve got a higher debt load and minimal liquid assets, don’t be a hero, seek shelter in a longer fixed term. You can still find them below 3% on insured mortgages, and as low as 3.19% if uninsured.

At most, if your finances aren’t solid and you do want to gamble on a variable, consider:

  • a hybrid rate where at least part of the rate is fixed
  • a 3-year fixed (which offers at least some protection from rising rates)
  • a variable with a fixed payment, whereby you can bank the payment savings (versus a 5-year fixed) for a rainy day.

18 Comments

  • Nikola says:

    “By the way, OSFI’s imposition of the stress test on renewals (switches) is easily one of the worst policy decisions in Canadian mortgage history”.

    Woah – a renewal and a switch are two different things. Surely you want lenders to underwrite someone at a “switch”, right? And my understanding is renewals (ie: no new underwriting because no change in lender) are not subject to the stress test, isn’t that true?

    I also wonder whether you believe that underwriting (prior to the implementation of the stress test) was robust enough – I assume yes? Do you have better data than OSFI to support that claim? Because clearly, OSFI disagrees and believes underwriting standards should be tightened up. I have no problem with that: OSFI’s mandate is to ensure the stability of the financial system and I’d prefer an overly prudent/cautious regulator. Weren’t the Canadian and Australian regulators lauded during the GFC for their prudence while other nations felt significant liquidity and credit issues?

  • The Spy says:

    Of course the new lender has to underwrite the deal, but there’s no meaningful justification to hold a borrower to a much higher standard at a new lender (just so they can get a competitive rate) when that borrower adds no meaningful risk to the system by switching lenders, and has paid as agreed for years.

    Regarding OSFI’s data, how would you know if someone else’s data were any better? This government committed publicly to “evidence-based” decision making, yet has never shared an ounce of “data” to support its drastic 200 bps stress test on *all* conventional bank borrowers, one of the biggest mortgage rule changes of all time.

    There’s ample evidence to support that most low-ratio borrowers did not require a 200+ bps higher qualifying rate:

    * Most of these borrowers could have refinanced, even in the highly unlikely event rates surged as home prices plunged.

    * There were an array of other alternatives, including limiting refis to 75% LTV and requiring a 5-year term to qualify, which considerably increases the odds that most people could refi at maturity.

    * If arrears are the concern, note that Canada’s default rate is a massive 296 bps below the global average, according to the Centre for Economic Policy Research. Despite a 10%+ y/y drop in national average home prices (>20% from the peak in Toronto), defaults haven’t budged.

    * The prior stress test withstood the greatest recession in modern times, withstood a doubling of the DTI ratio, withstood 20%+ interest rates, withstood whatever the economy could throw at borrowers.

    * An unreasonably high stress test forces indebted borrowers into much costlier debt. That’s a fact. This exacerbates insolvency risk even more. Remember, not all debt is avoidable or frivolous. Life circumstances happen and people who are not default risks unequivocally need the ability to restructure that debt.

    There’s only so much that tail risk can justify over-tightening. But by all means, if *your* data shows that a borrower with a 39% gross debt service ratio and $30,000 of 20% debt on December 31, 2017 is considerably less risk to the system than the same borrower with a 49% GDS ratio and $30,000 of 20% debt on January 1, 2018, I’ll happily rethink this position.

    As we’ve written countless times, much of the rule tightening that’s occurred is prudent and prudence is beneficial.

    Over-prudence is not.

    It’s like lowering the speed limit to 80 km/h to save more pedestrians. Whether you get hit by a car going 80 km/h or 100 km/h, you’re still dead. You could cut it to 40 km/h and give pedestrians a chance, but then people don’t get anywhere. The law of diminishing returns applies to policy too.

    What we should be more worried about is not higher-DTI borrowers. It’s what’s causing higher debt-to-incomes.

    Like I wrote earlier today, making cost-effective debt inaccessible to people who need it and would repay it is not the answer. That’s treating the symptom, not the cause. You might as well try to solve world hunger by growing more corn in Nebraska. Lack of global food isn’t the problem, poverty is the #1 problem.

    The point being, government must correct *root* causes for long-term results. In housing policy, root problems include insufficient access to affordable housing and poor debt management/lifestyle skills (both of which boost debt ratios considerably). Failing to address the origin of over-indebtedness simply ensures that debt risk will once again balloon, the minute borrowers adapt.

  • Van Broker says:

    Nikola: Where is your data????? The fact that you’d prefer an overly prudent/cautious regulator means nothing. All I hear is O P I N I O N, O P I N I O N, O P I N I O N. No data.

    You want to talk about OSFI’s mandate? OSFI’s MANDATE is to take a “balanced approach” to regulation. There is NO balance with federal regulation today. Lending competition is unbalanced, insurance premiums are unbalanced and rates available to consumers are unbalanced.

    Two weeks ago one of my clients got quoted 3.59% by their bank at renewal. That was for a 2 year fixed! I could have got him 2.99% but his TDS was 45.5% due to OSFI’s ridiculous stress test. So he was stuck. He couldn’t escape the bank and ended up paying 35 bp more for a 5 year fixed he didn’t want. Now he’s facing a nice fat IRD penalty if he needs out after two years.

    If you think the world is a better place with people being rate gouged for no reason, you’re just as myopic as our public servants on Albert Street.

  • Nikola says:

    “a borrower with a 39% gross debt service ratio and $30,000 of 20% debt on December 31, 2017 is considerably less risk to the system than the same borrower with a 49% GDS ratio and $30,000 of 20% debt on January 1, 2018, I’ll happily rethink this position”

    Your borrower on Dec 31 had an actual 39% GDS (actual payments / actual income) and that was clearly unacceptable to the regulator. They are unhappy with 39% GDS for reasons. Do you think 39% GDS is prudent enough?

    Anyway – back to your borrower at 39% – OSFI wants to pare down his debt such that his actual GDS is lower (pick a number, 34% for arguments sake). The stress test makes said borrower reduce his borrowing so that on an actual basis his GDS comes down to 34%. His actual GDS didn’t change a lick from Dec 31 to Jan 1, but the regulator is pushing the lenders to reduce their GDS exposure over time, right? So, borrowers will need to reduce their debt burden otherwise they won’t get access to the best rates. Am I missing something? Are there people with good GDS numbers that aren’t able to pass the stress test at renewal? Those that fail do so because they were levered beyond what OSFI thought was appropriate (ie: they had a 39% GDS when OSFI thought they should be at ~34%).

    “If you think the world is a better place with people being rate gouged for no reason, you’re just as myopic as our public servants on Albert Street.”

    They are being rate gouged for a very good reason: their debt ratios are too high. Your clients actual TDS (actual payments / actual income) is probably something like 40%, right?
    Should he get the same interest rate as a borrower with a 20% TDS?

  • The Spy says:

    “Do you think 39% GDS is prudent enough?”

    > Refer to prior response.

    “OSFI wants to pare down his debt such that his actual GDS is lower”

    > This hypothetical borrower’s risk is *higher* on January 1, 2018 because he can no longer refinance at top prime lenders. He’s being forced into a high cost of carry by big brother. That not only exacerbates his family’s risk, but (when you aggregate people like him) the economy’s risk.

    “The stress test makes said borrower reduce his borrowing”

    > Some will be dissuaded by credit tightening. Countless others will be forced to incur more debt, and remain in debt far longer because they have no economical way out of it, courtesy of the new stress test.

    “The regulator is pushing the lenders to reduce their GDS exposure over time, right?”

    > Wrong. OSFI effectively slashed GDS overnight, radically.

    “Borrowers will need to reduce their debt burden otherwise they won’t get access to the best rates.”

    > True for some. Fallacy for many. Few plan for divorce, layoff, business failure, medical emergency, etc. Borrowing to survive has a weak correlation with interest rates. And that doesn’t even speak to chronic debtors, who are similarly rate inelastic. The point being, people who are reasonable credit risks must have a cost-effective way to restructure debt or we *all* pay an economic price.

    B-20 is like trying to fix a burst water main with duct tape. Think about the *root* causes of high indebtedness, Nikola. Fixing root causes is the only long-term hope for stability, not regulating-away flexibility for qualified borrowers. Next thing you know the Department of Finance will require 800+ credit scores to get a variable rate.

  • Ralph Cramdown says:

    The root cause of high indebtedness is easy credit. We are now in the tightening part of the credit cycle and, if history is any guide, credit conditions will continue to tighten until the economy breaks. Not until the Cassandras’ warnings are heeded, not until we’ve achieved a “soft landing,” but until the economy breaks. This will likely be accompanied by falling asset prices, higher unemployment and tighter credit conditions *even if interest rates are lower than today*. Overleveraged clients would probably be best advised to deleverage now if they think debt service at 4% with a test at 6% is punitive and difficult.

    Whether you think this is a good outcome or not isn’t really the point — it’s just how credit cycles typically resolve themselves.

    • The Spy says:

      “The root cause of high indebtedness is easy credit.”

      That’s unquestionably a cause, but not the only cause.

      Take a look at what’s driving credit growth. It isn’t just 8-year car loans. It’s primarily those boxes with roofs that people like to live in. Why are they paying so much for shelter? Low rates are part of it, but income, population and supply effects matter more. The Bank of Canada paper, “Medium-Term Fluctuations in Canadian House Prices,” covers this topic.

  • Tim Wealthmore says:

    in order to afford and business to continue-prices need to come down friends of math and risk

  • Ratchel says:

    I made the mistake of being responsible and putting a 20% down payment on my cottage. Now that it is time for my mortgage renewal, I’m stuck with bad rates because my loan is not insured. My current lender offered me in march, a 5 year fix at 3,59% or a 5 year protected variable at 2,99% (prime -0,46) that can’t go higher than 4,19%. With the announced hikes, I know the variable will quickly get to that 3,59 or even higher (and I can withstand a 4,19, I don’t have a big mortgage) but in the long term, if the rates go down again…Any advice as to what I should do?

  • clinton says:

    Should i get fixed or variable and at what term? – for my principal residence. Recommendations are much appreciated. Thank you 🙂

  • Cindy says:

    I’m due for renewal this May 30th, and my bank is giving me 3.54% 5 yr. fixed. Still have 190k on the mortgage. Current rate is 2.88 also 5yr fixed. Any advise or recommendation. Thanks in advance

  • Zach Davidson says:

    What is your advice on a fixed rate mortgage today, whether to lock in for 3 or 5 years? On one hand, not much of a difference in rates. My sense is 3 years provided more flexibility, should rates turn down in 3 years. 5-years, some more peace of mind. Thoughts?

    • The Spy says:

      Excellent question Zach,

      Someone might be able to save 10 bps (+/-) in a 3-year fixed but the present value of that savings is just $272 over three years, per $100,000 of mortgage.

      If you have to re-up at rates that are 10 bps higher at renewal, that puny upfront edge won’t be worth it. Plus you have to go through renewal hassle/expense two years sooner.

      I’d be more prone to take a 3-year if the spread were wider, and/or if I needed flexibility to refinance, sell outright or port and increase my mortgage before five years.

  • Tyler Durden says:

    The spy said:

    “Over-prudence is not.

    It’s like lowering the speed limit to 80 km/h to save more pedestrians. Whether you get hit by a car going 80 km/h or 100 km/h, you’re still dead. You could cut it to 40 km/h and give pedestrians a chance, but then people don’t get anywhere. The law of diminishing returns applies to policy too.”

    https://www.thelocal.fr/20180108/france-set-to-lower-speed-limit-despite-lack-of-support

    lowering the speed also allows the driver to better react. Your simplistic view of surviving the collision is myopic. The collision can be interpreted as “Loss given default”. Whether you hit a pedestrian or not, is “probability of default” and lowering the speed unambiguously lowers the PD in this example.

    • The Spy says:

      Pedestrians (homeowners) will get hit (default) regardless of the speed limit (qualifying restrictions).

      Do you want to save all pedestrians, or do you want goods and people to get from A to B before they’re dead? How much lower do you want defaults? 24 basis points isn’t low enough apparently.

      But no, it’s not about defaults, right? It’s about losses given default, or risks to consumer spending, or housing affordability, yada, yada. Well, we submit there’s more to the problem than the qualifying rate and that the qualifying policy adds to the problems for the most vulnerable Canadians.

      Fix the reasons people get in wrecks. Don’t slow down their cars. That’s the way to save lives, and it comes with fewer long-term side effects.

      This ain’t your first night at Fight Club, Tyler, you don’t have to fight. Be nice.

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