It’s a mistake to shrug off interest rate increases because all banks are doing it.
There’s a lot of sameness to how banks treat their customers, but raising rates is an exception. We’ve recently seen varying levels of aggressiveness in raising mortgage rates. And in one case, we’ve seen an unusually shaky hand in ramming through a rate hike on lines of credit. If you’re a borrower, keep an eye on how banks compare with each other to make sure you’re not getting shafted.
One bank that stands out on rates is Toronto-Dominion Bank, which sent letters roughly a month ago to what it described as a small percentage of clients with home equity lines of credit, or HELOCs, as well as regular lines of credit. The letters advised that the mark-up over the prime rate for their credit lines would rise as much as 1.5 percentage points.
On April 25, TD sent a “correction notice” to some of the same people – those who have their HELOC with TD and their mortgage at another lender – to say they will not have to pay a higher rate. “The original letter was sent by mistake,” a TD spokesperson said in an e-mail. “We sincerely apologize for any confusion or inconvenience we may have caused.”
TD declined to say any more about its mistake, but it looks like a beaut. You don’t want to agitate clients unnecessarily at a time when they’re already stressing about rising rates. Borrowers with lines of credit have had their interest rise by a total 0.75 of a percentage point since last summer as a result of moves by the Bank of Canada to increase borrowing costs.
“I’ve been with TD for 40 years and it was communicated to me in a letter that they were drastically increasing the cost of my available credit for no particular reason,” said Mark Noxon of Toronto, who received both the original letter and the apologetic follow-up. “My credit rating is stellar. It just doesn’t smell good to me.”
Rob Fennimore, another long-time TD client, says he thought of moving several accounts away from TD after he got his initial letter, but decided to stay after the rate hike was cancelled. “My primary concern, obviously, was not getting hosed,” the Ottawa resident said. “Now that that’s taken care of, I’m happier than I otherwise would have been.”
The view of the big banks as being pretty much the same from the client’s point of view was highlighted in the recent 2018 J.D. Power Canadian Retail Banking Satisfaction Study. Royal Bank of Canada took top spot with a score of 788 out of 1,000, Toronto-Dominion Bank was second at 787, Bank of Montreal was third at 781, Canadian Imperial Bank of Commerce was fourth at 766 and Bank of Nova Scotia was next at 762. Differences from top to bottom here seem almost inconsequential.
Banks sometimes behave the same, too. When the Bank of Canada cut its overnight rate by a total 0.5 of a percentage point back in 2015, all the banks lowered their prime rate by a total of just 0.3 of a point. The solidarity was notable, given how out of line it is for banks to not pass on the full extent of declining rates.
The recent upswing in mortgage rates shows no such solidarity among banks. TD stepped away from the pack recently by raising its posted five-year fixed mortgage rate by a hefty 0.45 of a point – to 5.59 per cent from 5.14 per cent. Other moves left RBC and Scotiabank at 5.34 per cent at mid-week, BMO at 5.19 per cent and CIBC at 5.14 per cent.
Posted mortgage rates aren’t what you actually pay, but a rising trend in these rates can still be felt in a variety of ways. Discounted rates might end up a little higher, for example. Rising posted rates can also make it a little tougher to pass the stress tests that gauge whether home buyers can afford to pay their mortgage if they have to renew at much higher rates in the future, and they can make penalties for breaking mortgages with a bank more expensive.
Expect more interest rate increases to come in the months ahead, and for the banks to go their own way on passing higher borrowing costs onto clients. It’s never been more important to know how your bank compares. Stay tuned for some help with this.
Rob Carrick