FIXED MORTGAGE RATES
As you have likely noticed, fixed mortgage rates have been climbing steadily for several months now. I know, I know, we were all very spoiled with record setting low rates … but it had to come to an end sometime.
Given the significant impact that mortgage rates have on the cost of homeownership and the housing market in general, this article focuses on the key factors that explain mortgage rate fluctuations in Canada.
First, it is important to note that the factors that determine variable mortgage rates are different than those that determine fixed mortgage rates. I am talking only about fixed mortgage rates in this article.
Fixed rate mortgages are primarily prompted by the yield on Canadian government bonds (also known as bond yields) of corresponding maturity. Bond rates represent the benchmark for financial institutions’ cost of funds. The difference between the two rates (mortgage rates and bond yields) represents the yield that financial institutions require to lend the funds out on the mortgage market. The cost of capital for financial institutions is dictated by bond yields because they reflect what the market considers to be the cost of funds for the lowest level of risk for a given period.
Factors Influencing Bond Yields. In order to understand mortgage interest rate fluctuations, we should be familiar with the factors that influence Canadian government bond yields.
Bonds issued by the Canadian government are among the most liquid and least risky assets, since they are guaranteed by the Canadian government. A significant volume of bonds are traded daily in the investment market. Supply and demand in the bond market determines their price, which in turn, determines their yield.
This yield can be seen as the minimum rate of return required by investors before investing their capital for a determined period. It is influenced by many factors, particularly inflationary expectations, exchange rate, and the return on other financial assets. .
Mortgage rates in Canada are determined by many factors that are directly related to domestic economic activity and decisions made by Canadian financial authorities. They are also influenced by foreign economic conditions and investors’ view of Canada’s financial and economic health.
The 5-year Government of Canada bond yield, which leads fixed mortgage rates, has been trending higher since the end of September.
Our Canadian economy is slowly recovering, which is great news. However, this also means the end of the historic low mortgage rates … and you’d be well advised to lock in your mortgage (renewal, refinance, or new purchase) now.
Candace Perko,
Mortgage Broker
