Government of Canada 5 year bond yields soared this week to its highest level in months. The jump has been fuelled by a brighter economic outlook for the Canadian economy and was bolstered by the surprisingly strong jobs report that was released by Statscan yesterday.
Pressure on higher fixed mortgage rates
Higher 5 year bond yields, which the benchmark 5 year fixed mortgage rates typically track, closed yesterday at 2.73 which is an astounding 47% higher than they were at their recent low point in mid-October. 5 year fixed mortgage rates typically follow bond yields, however, interestingly we have not seen a similar increase in fixed mortgage rates – yet.
Source: Bloomberg
Mortgage lenders will now be under pressure to increase fixed mortgage rates to maintain the spread, the difference between their cost of funds and the rate they lend funds out, to their historical ‘normal’ levels of about 1.20%. The fact that this spread is now under 1% with discounted 5 year fixed mortgage rates being offered at 3.69% – 2.73% current bond yield = 0.96%, is a very unusual situation.
Mortgage lenders holding steady
I spoke with the President of a national mortgage brokerage and a senior manager at a major mortgage lender yesterday and they cited different reasons that lenders are holding on to rates at these yields. They mentioned that as the RRSP contribution deadline and end of the tax year approach some of the major banks could be looking to win customers, so they’re willing to make a lower margin on the mortgage to hopefully get additional RRSP business too. Also, the mortgage landscape is changing as 2011 isn’t expected to be a big year in terms of home sales with a forecasted drop in house prices and new mortgage rules that come into effect next month, so the big banks are looking to gain market share and attract new mortgage customers in the 1st half of the year. There is even an indication that one of the major lenders may drop their fixed mortgage rate next week to try and gain market share, despite the reason increase in bond yields.
With the Bank of Canada not expected to increase interest rates until later in the year, therefore keeping variable rates steady for the next few months, and increasing competition among mortgage lenders this is great news for Canadian mortgage customers. There is pressure to increase fixed mortgage rates, and we may see a slight bump next week, so if you’re looking for a mortgage right now, it’s a good time to get pre-approved before rates go up, but for the most part mortgage rates should stay relatively low.
We’ll be releasing our February mortgage rate outlook on Monday, so check back to see what our panel of experts believe is in store for short term mortgage rate trends.
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