By Nichola Saminather
TORONTO (Reuters) -Canada's biggest banks said on Wednesday they will raise their prime lending rate by 50 basis points to 3.2%, a two-year high, following the Bank of Canada's benchmark rate hike, moves that could rein in the country's red-hot housing markets.
The country's four biggest banks - Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia and Bank of Montreal - said the higher prime rate, which variable-rate mortgages are tied to, will come into effect on Thursday.
Variable-rate mortgages have grown in popularity as the gap between these and fixed-rate mortgages has widened over the past several months. They accounted for 55% of all mortgages, according to Bank of Canada data https://www.bankofcanada.ca/rates/banking-and-financial-statistics/funds-advanced-and-outstanding-balances-for-new-and-existing-lending-by-chartered-banks/#download.
The central bank raised its overnight rate on Wednesday by half a percentage point to 1%, the biggest single move in more than two decades, and said more hikes are coming.
"Canadians with variable-rate mortgages and home equity lines of credit (HELOCs) will feel an immediate impact," James Laird, co-founder of mortgage rate comparison site, Ratehub.ca, said in an emailed statement.
The moves follow 25-basis-point prime-rate increases last month.
Canada red-hot housing markets, a source of growing concern for regulators and authorities, have already started to see some slowing in price growth due to affordability issues and in anticipation of rate hikes.
Fixed mortgage rates have also already risen alongside bond yields, and are now close to 4% at Canada's biggest banks.
This means the floor of Canada's mortgage stress test, which set the qualifying rate at the higher of 5.25% or 200 basis points above the rate the borrower pays, has already shifted to the latter for these loans.
A 1-percentage-point increase in the stress test reduces affordability by about 10%, Laird said.