Blog by Mark Longpre

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Canadian mortgage rates rise

TORONTO — Mortgage rates are on the upswing in Canada, signalling an end to historically low rates and an indication that the country's housing market is finally poised to cool off.

Royal Bank, TD Canada Trust and Laurentian Bank announced Monday they are raising rates they charge on certain fixed mortgages, including the benchmark five-year mortgage, which will jump 60 basis points to 5.85 per cent effective Tuesday.

"This is actually a fairly large increase reflecting what's happening in the bond market lately," said Benjamin Tal, senior economist with CIBC World Markets.

Anticipation over the Bank of Canada raising its overnight lending rate, possibly ahead of schedule, is pushing up bond yields, Tal said. And rising yields puts pressure on fixed-rate mortgages.

While rising mortgage rates are certain to price some prospective buyers out of the market, the trend is required to prevent a housing bubble, Tal said.

The market has been red-hot for years and even remained robust throughout the recession.

Before the banks hiked rates, mortgage interest payments as a share of income were around the same proportion as four years ago, when rates were much higher, he said.

"That reflects the fact that we took so much mortgage, which shows the starting point is not great in terms of affordability. That's why we'll see the bank being very effective in its ability to slow down the market. And that's a good thing."

Higher residential rates should lead to a gradual softening of the real estate market through 2011, Tal explained.

"The highs will not be so high and the lows will not be so low."

The banks also hiked four-year term closed mortgage rates by 40 basis points to 5.34 per cent.

Royal and Laurentian's three-year products rose by 20 basis points to 4.35 per cent, while the equivalent at TD Canada Trust gained 40 basis points to 4.70 per cent.