Canadian mortgage rates are closely tied to the bond market and increases in bond yields typically lead to increased fixed mortgage rates. Bond yields have increased significantly since early October, with the 5-year Government of Canada (GOC) bond yield reaching its highest level since November 2018. As bond yields continue to rise, fixed mortgage rates could follow suit.
The rise in bond yields can be attributed to a number of factors, including the vaccine news late last month that caused a "risk-on" sentiment among investors, resulting in them shifting to higher-yielding investments such as bonds. This, in turn, has had an effect on the mortgage market as lenders have increased their rates accordingly.
Another factor is the Bank of Canada's (BoC) decision to hold its overnight rate at 0.25 per cent via a caps and floor system. The caps and floor system aims to keep borrowing costs low, but also may act as an impediment to the BoC's interest rate – and therefore bond yield – policy. The result is that yields on long-term Government of Canada bonds have begun to increase faster than the BoC intended, putting upward pressure on fixed mortgage rates.
The recent surge in bond yields has meant that fixed mortgage rates across the country have already begun to climb. The average rate for a five-year fixed mortgage is currently 2.16 per cent, up from 1.99 per cent just one month ago. It is possible that these rates could increase even more should bond yields continue to rise.
Given the uncertain economic outlook, prospective mortgage borrowers may want to lock in their rate sooner rather than later to avoid any potential increases. For those looking to refinance, now could be a good time to do so while fixed mortgage rates are still relatively low.
Overall, fixed mortgage rates in Canada are set to climb higher as bond yields take off. The increase in yields is due to the recent positive news regarding a vaccine, as well as the Bank of Canada’s decision to use caps and floors for its overnight rate. Mortgage borrowers should keep an eye on the bond market in case rates increase further, and look to lock in their rate before it climbs too much higher.
Analysis:
A fixed mortgage rate is a rate of interest that is based on the prevailing bond yields in the market and in Canada, they closely follow the bond market’s performance. As such, when bond yields increase, fixed mortgage rates often increase as well. This is exactly what is happening in Canada right now with bond yields increasing significantly since early October and the average rate for a five-year fixed mortgage being at 2.16 per cent, up from 1.99 per cent just one month ago.
The main reason for this is that there has been positive news about a vaccine recently, leading to a “risk-on” sentiment among investors. This has caused them to shift to higher-yielding investments such as bonds, which has put upward pressure on fixed mortgage rates. Additionally, the Bank of Canada’s decision to use caps and floors for its overnight rate has also contributed to an increase in bond yields and thus higher mortgage rates.
Given the uncertain economic outlook, prospective mortgage borrowers should keep an eye on the bond market in case rates increase further and look to lock in their rate before it climbs too much higher. For those looking to refinance, now could be a good time to do so while fixed mortgage rates are still relatively low.
This article was contributed on Oct 17, 2023
