Canadians have enjoyed particularly low fixed mortgages rates for several years now, and they have the bond market to thank. As the bond market and fixed rates have a close relationship, historically-low yields have allowed banks to offer rock bottom pricing. In some instances, fixed rates have been priced as low as variable rates which, because they follow the Bank of Canada’s overnight lender rate, are typically much cheaper than the fixed variety.
But the days may be numbered for great fixed-rate discounts, as bond yields are rising around the globe. Experts are predicting fixed mortgage rates will be soon to follow.
Why is this occurring – and what can prospective mortgage borrowers expect? Here’s our breakdown.
What’s Happening to Bonds?
Bond investors are selling their bonds off around the world, causing prices to slump and yields to soar. There are a number of different reasons behind this trend:
- In Europe, German bonds are slumping due to a continent-wide sell off. This is partly due to improving European economic data, which has eased the fear of deflation, and pushed yields higher throughout the Eurozone.
- In the U.S., a positive economic forecast and improved housing activity rising is pushing people out of ultra-safe government bonds.
- In Canada, oil price concerns and a manufacturing slump have sent government bonds yields rising – quickly. As of February the yield on Government of Canada five-year bonds has gone from 0.59 per cent to about 1.066 per cent. As well as 10-year bonds yielding 1.24 per cent have moved up to 1.798 per cent.
Remember – as bond prices fall, yields always rise.
Fixed Rates Poised to Rise
The good news is experts believe the market can handle a steady change to interest rates, even if it means higher mortgage prices. However, a sharp rise, like yields’ current spike, makes it hard to predict just where fixed rates are headed. “Markets can handle slowly, gradually rising interest rates as an economy continues to improve. The uncertainty is that these are pretty significant moves,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. “That’s why you’re starting to see stocks sell off a little more aggressively.” Because fixed mortgage rates are at historic lows, opinions are mixed whether bond yields will push our cost of borrowing higher too. But if banks are unable to secure low rate bonds for a long term, they can’t continue to offer low rates to customers.
Are Fixed Rate Mortgages Still a Good Idea?
A rise in fixed mortgage rates may be discouraging to some customers, especially as variable mortgage rates continue to be priced at record lows. The Bank of America recently predicted our central bank will cuts rates again as early as the fall as Canada’s economy slumps due to the slide in oil prices and the possible need to stimulate the economy. Such a move would see banks cutting their Prime rates, and as a result, their variable-rate offerings even further.
However, if you are in the market to buy a home, it’s still prudent to lock into a fixed rate. While yields are up, fixed rates are still historically low, and it’s a great move to take advantage of them. Just keep in mind – the banks’ need to increase their margins may mean a very different rate pricing environment come renewal time.