About two-thirds of first-time buyers say they’ll purchase a home as planned and are unaffected by new mortgage rules brought in by Ottawa a year ago, says a new survey.

The findings come as the banks continue to increase long-term interest rates in the face of rising bond yields but refuse to bump up the posted rate for a five-year, fixed-rate closed mortgage – a key measure in deciding how much a consumer can borrow after the new rules were introduced.

Rates on the five-year mortgage have been rising steadily since the beginning of May in response to bond yields. At one point the Bank of Montreal offered a five-year, fixed-rate closed mortgage for as little as 2.99%, but that’s now up to 3.59%.

Meanwhile the posted rate has stayed at 5.14% at most banks. That posted rate is used by Ottawa to establish what is called the qualifying rate for consumers who require mortgage default insurance. Consumers not locking in for five years or more face the qualifying rate but, since it hasn’t risen, they can borrow as much as ever.

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Canadian housing starts were stronger than expected in June and May figures were revised higher, according to data released yesterday – the latest report to show the property market rebounding from last year’s government-induced slowdown.

The seasonally adjusted annualized rate of housing starts was 199,586 units in June, according to data from the Canadian government’s housing agency. Analysts polled by Reuters had expected 187,000 starts in June.

CMHC also revised May starts higher, to 204,616 from the 200,178 originally reported.

The stronger-than-expected numbers helped boost the Canadian dollar in early trading.

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About two-thirds of first-time buyers say they’ll purchase a home as planned and are unaffected by new mortgage rules brought in by Ottawa a year ago, says a new survey.

The findings come as the banks continue to increase long-term interest rates in the face of rising bond yields but refuse to bump up the posted rate for a five-year, fixed rate closed mortgage — a key measure in deciding how much a consumer can borrow after the new rules were introduced.

Rates on the five-year mortgage have been rising steadily since the beginning of May in response to bond yields. At one point the Bank of Montreal offered a five-year, fixed rate closed mortgage for as little as 2.99% but that’s now up to 3.59%.

Meanwhile the posted rate has stayed at 5.14% at most banks. That posted rate is used by Ottawa to establish what is called the qualifying rate. Consumers not locking in for five years or more face the qualifying rate but since it has hasn’t risen they can borrow as much as ever.

A department of finance spokeswoman noted the five-year is set by the Bank of Canada and is based on the posted rates at Canada’s largest banks.

“The Government continues to monitor the mortgage market and protect taxpayers,” said Stéphanie Rubec manager, media relations, via email. “Prices for financial products, including mortgage interest rates, reflect a financial institution’s business decisions. Due to the fact that taxpayers are the ultimate backstop for government-backed insured mortgages, financial institutions are expected to lend prudently.” 

Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, said for most consumers it hasn’t had an impact because the majority of mortgages are for longer than five years — meaning consumers can use the lower rate on their contracts to qualify.

“The profile for our customers is the longer term anyway so it hasn’t had a material impact,” said Ms. Haque.

The Bank of Montreal survey, conducted by Pollara, found on the one year anniversary of the latest mortgage rule changes 66% of Canadians buying for the first-time will do so as planned.

Among the other changes was shortening of amortization lengths from 30 years to 25 years. The survey found 14% of Canadians will buy sooner, partially out of fear rules could get even tougher.

Meanwhile there is very little to indicate the posted rate will be rising any time soon, despite the fact government of Canada five-year bond has risen about 65 basis points since May 1.

“You do have to remember when rates where at all-time lows they didn’t lower the qualifying rate either,” said Rob McLister, editor of canadianmortgagetrends.com. “I have never talked to a banker or lender who has openly admitted they are keeping the rates low to qualify more people.”

He says it’s mostly a practical issue for qualification because very few people actually take the posted rate. Mr. McLister said some lenders like to keep it low to appear more competitive.

But there is no question the qualification rate will have to rise if bond yields keep rising. Plus, rising long-term rates might send people back to cheaper variable rate products, creating a more urgent need to tighten loan requirements.

“Once you get a one percentage point gap between short-term and long term, people start looking at variable,” said Mr. McLister.

David Madani, an economist for Capital Economics, agrees it is just a matter of time before the qualifying rate and posted rates start to jump. “There is usually a bit of a lag,” said Mr. Madani.

One bank economist, who asked not to be named, said there is a caution at the banks right now about the bond market. “They want to know that these rates are here to stay,” said the economist.

Canadians accustomed to cheap money are quickly realizing that the era of rock-bottom rates could soon be coming to a close.

Since the worst of the financial crisis, government interest rates in Canada and the United States have remained exceptionally low, and for the past three years government bond yields have kept falling to shocking depths, with the five-year Government of Canada bond dropping once again to below 1.2 per cent in early May.

Since then, however, there’s been a sudden turn.

Although the upswing in yields was anticipated, the feverish pace of this rise wasn’t. Since the beginning of May, the yield on 10-year U.S. Treasuries has spiked roughly 60 basis points, or 0.6 per cent, to hit 2.5 per cent, their highest rate since August, 2011. (A basis point is 1/100th of a percentage point.)

These yields affect many parts of the economy, from residential mortgage rates to the values of Canadians’ pensions. The sudden jump has caught many off guard. In the past month Royal Bank of Canada has already raised mortgage rates twice.

Bond yields began rising in early May when U.S. jobs numbers came in much better than expected, and then they shot up this week after U.S. Federal Reserve chairman Ben Bernanke suggested the central bank could start tapering its asset-buying program, under which the central bank now scoops up $85-billion (U.S.) of bonds and securities each month to keep their yields low.

Now interest rates on Canadian bonds are following suit because international investors largely view U.S. and Canadian bonds as alternatives to one another.

This is “uncharted territory,” said Toronto-Dominion Bank chief economist Craig Alexander.

“We’ve never been in a world where the Federal Reserve is buying $85-billion of bonds a month, and now the government is going to start scaling that back.”

As investors navigate the choppy waters, the question now, he said, is whether the recent spike in rates will hold. “Do they continue to climb, or does the market take a pause and recognize that it went too far too quickly?”

Whatever the outcome, uncertainty is weighing on everyone from small businesses to pensioners, who wonder how the market will shake out.

The Bank of Canada’s key interest rate isn’t expected to jump higher than its 1-per-cent level for some time, but government bond yields are at the whim of the market, and these yields are the benchmarks from which so many other products are priced.

Mortgage Rates

Royal Bank of Canada, the country’s biggest mortgage lender, has boosted its five-year rates for fixed-rate mortgages twice in the last two weeks to 3.49 per cent, and has also raised rates on mortgages of other lengths. Rival banks are following suit. These hikes follow a period during which rates sank to new lows, luring more people into the housing market. Such low rates prompted Finance Minister Jim Flaherty to lecture banks at a time of high consumer debt and house prices. Now the market is doing his work for him.

Personal savings

Canadians nearing retirement have had few choices for quality, dependable investments over the past few years – something they need at such a vulnerable point in their lives. Rock-solid 10-year federal government bonds that paid north of 4 per cent before the crisis offered returns less than half that amount until early May, and the banks’ super safe guaranteed investment certificates (GICs) barely offered more than the paltry inflation rate. That’s quickly changing as bond yields rise, widening investment options for baby boomers.

Business borrowing

The rates at which businesses of all sizes, from family-run restaurants to major corporations, can borrow money are quickly escalating. These rates are priced off soaring underlying government bond yields, which means the banks and the end borrowers have little control over them. However, the upside is that higher rates make the loans more economical for the banks, because they earn better margins on them. That means the banks should be more willing to lend money out – provided businesses have good reason to borrow.

Pensions

Low interest rates have caused serious pain for defined-benefit pension plans, and rising rates should be good news for people who are counting on payments from such plans in retirement. Pension accounting rules require plans to calculate a discount rate that determines whether they have enough money to fund their pension liability. This rate is priced off of bond yields, and higher yields translate into higher discount rates, making pension plans more solvent.