RBC and TD herald end of mortgage war

The mortgage war reignited by BMO barely a couple of weeks ago may end sooner than expected as RBC decides to raise its residential mortgage rates, effective March 29, 2012, promptly followed by Toronto-Dominion Bank.

Both RBC and TD are moving their special four-year fixed-rate mortgages up by 50 basis points to 3.49%. The rate on five-year mortgage is going up by 20 basis points to 5.44% while five-year variable rate will be revised up by 10 basis points to prime plus 20 basis points.

Residential mortgages make up a large part of banks’ balance sheets. The tough economic environment, spiralling household debt, stiffer lending requirements and speculation about an imminent crash in the housing market are forcing banks to use unconventional tools as they aggressively compete for marketshare.

When one bank lowers interest rates, other lenders feel compelled to follow suit, igniting a price war. With RBC, the largest lender in Canada, making a move in the opposite direction, it’s not surprising that TD Canada Trust has followed suit and also axed its discount offering, with its five-year mortgage, five-year variable mortgage and four-year fixed-rate mortgage all being raised to match the rates now offered by RBC.

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RBC’s decision is in line with the view of the majority of Canadians who expect mortgage rates to be higher over the next 12 months.