In the past year we have seen fixed mortgage rates jump by 3% from the record low rates we had during the pandemic.
At the same time variable rate holders have also seen substantial changes to their mortgage interest rates with the Bank of Canada increasing rates over 2% since its first increase back in March of this year. While all interest rates are reflective of the economy, the 5 year fixed rate is directly linked with the 5 year Bond yield, not Prime rate like Variable Rate Mortgages.
Fixed Rates and Bond Market Yields
During what’s called Quantative Easing or QE, the Bank of Canada buys bonds, this raises the price of the bonds and lowers their return, or yield. Lower yields make it cheaper to access credit to encourage households and businesses to borrow so they can spend and invest. During Quantative tightening (QT), the opposite happens. The Bank stops buying bonds, yield returns increase which then increases interest rates to slow down borrowing.
Simply put as bond yields rise, interest rates rise, as bond yields lower, interest rates lower.
Fixed rate is directly impacted by bond yields. Generally, lenders like to set their fixed rates about 1.25% higher than the bond. When you see the bond yield go up, you can anticipate increases in fixed rate approximately by an additional 1.25%. This is an estimated guideline and not a set figure.
What’s happening today?
We are in a period of QT, and the Government of Canada 5-year bond yield is soaring at one of the fastest rates ever. For perspective over the last 30 years there is only one other time in the 90’s when it increased this fast. Today it sits above 3% compared to the 0.30% during the pandemic low.
The last time the 5-year sat around this level was during the Great Recession of Fall 2007 to Spring of 2008. At that time, the 5-year fixed mortgage rates were common to be above 5%.
If you are already locked in to a fixed rate mortgage for a term, the rising fixed rate this will not affect you. However it will if you are purchasing a property, refinancing with a fixed rate or if your mortgage is up for renewal in the next 6 months, as you will notice your renewal rates will likely be higher than what you were paying previously.
If you are looking at renewing your mortgage, refinancing or purchasing, we recommend that during this period of QT and increased inflation that it may be a good idea to consider shorter terms such as a 2-3 year so that you have an opportunity to redo your mortgage when interest rates may be lower, rather than locking in to 5 year mortgage at the highest rates we have seen in over a decade. We help all our clients with their renewals to ensure their current lender is earning their business and that they product they have is the best option for their unique needs.
If you are purchasing a home, renewing your mortgage within 6 months or refinancing to pull out equity, the sooner we talk with you the better- do not delay in an interest rate rising environment like we are experiencing right now.
