Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is taking advantage of a stronger economy as the bank recently announced it was raising its mortgage rates. Although it raised several different lending rates, its five-year benchmark is the one that gets the most attention, and that rate was increased by 45 basis points to 5.59%. As rates go up in the bond markets, we start to see a trickle-down effect, and the result is that consumers end up paying more for their mortgages.
Implications of rising rates
TD is taking the lead on rate hikes, and since the announcement last week, both Royal Bank of Canada and Canadian Imperial Bank of Commerce have gone on to raise their rates as well. For those looking to secure mortgages, it’s a significant development, since it will likely affect rates that other lenders have as well, since the move will help justify increases across the industry.
And while a buyer might get a better mortgage rate than TD’s posted five-year term, it’s still likely that their cost will go up, and one of the new stress tests for mortgages is using the average posted rate from the big banks to determine a borrower’s ability to pay back funds.
Why the news is good for investors
While rising interest rates might appear to have a lot of negative consequences, there are positives as well. After all, the bank believes the economy is going in the right direction, as it wouldn’t be raising its rates if it didn’t think consumers wouldn’t be able to pay a higher rate of interest. Another positive is that higher interest rates can help TD achieve a stronger top line and increase its spread, which will help improve earnings and payouts to shareholders.
The bad news
Rising interest rates will have an adverse impact on a borrower’s ability to get a mortgage, which will make it harder to grow the number of mortgages that the bank issues. However, the increase in spread will offset the decline in mortgages; otherwise, TD wouldn’t be making the move in the first place. In the long term, borrowers that need to renew their rate could face the risk of default, as personal debt levels continue to climb, and many consumers already struggle to make ends meet.
Why TD is a better buy than its peers
Toronto-Dominion stock has normally outperformed its peers or been near the top, and one of the reasons investors like to invest in this bank is its diversification and exposure to the U.S. market. Among Canada’s Big Five banks, TD is expected to benefit the most from the reduction in U.S. corporate taxes — a move that was approved late last year.
It will benefit from rising rates as well, and while it will face some added risk of borrowers defaulting, it won’t be as exposed as other Canadian banks will be, and in the meantime, it can also take advantage of a strong U.S. economy as well. TD has a solid dividend, and with strong growth opportunities ahead, it is a great long-term buy that would look great in any portfolio.
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Fool contributor David Jagielski has no position in any of the stocks mentioned.