How Bond Yields Affect Fixed Mortgage Rates

how are fixed mortgage rates affected by bond yields?

Bonds and Fixed Mortgage Rates

When a bank offers you an interest rate on a loan (mortgage) they are being guided by the rate they are getting themselves. This market rate is what they are paying to borrow the money for you from either their customers or other institutions. They pay those people a smaller amount of interest on the loan that they can lend to you for a higher rate to make a profit, also referred to as a spread. If it’s costing the bank more money to borrow, that cost will be downloaded on to the lender.

Why Fixed Rates Might Rise

With the crises in the European Union continuing to affect North American business operations, government and corporate bonds are starting to suffer. Investors know anyone doing business with any European nation is at higher risk of defaulting. For that they are demanding a higher rate to get a long-term loan that a bank can then offer to their lending clients. This risk is also affecting Canadian bond rates.

Why Do European Problems Affect Canadian Rates?

The European Union is Canada’s second most important trading partner. In 2009, Canada’s bilateral merchandise trade with the 27 current members of the EU totaled $75 billion, consisting of almost $30 billion in Canadian exports to, and $45 billion in imports from the EU, according to Canada’s parliamentary website. The EU is growing in importance as a trading partner for Canada, especially as an export destination. From 2004 to 2009, Canadian exports to the EU grew at an average rate of more than five per cent per year. If this trade relationship is strained it can be reflected on bond yields. Investors want more reward on their investment if your business looks more risky.

Shopping For a Mortgage?

If you are shopping for mortgage right now your best bet would be to lock into the best fixed rates while they’re still at such record lows. By securing a low rate today you could save yourselves thousands of dollars during the life of your mortgage. However, there’s no need to panic; rates are not going to skyrocket overnight. Take your time when choosing the rate, the bank and the term that works best for you and your family. Watch the bond markets carefully as they are best indicator of were interest rates are headed in the short to medium future.

 

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