As Canadian interest rates potentially decrease, the bond market is painting a different picture, hinting at higher mortgage rates. Following recent rate cuts by the central bank, Government of Canada (GoC) bond yields are on the rise, impacting the cost of fixed-rate mortgages. This shift might catch some off guard, especially those anticipating further rate reductions.
Government Bond Yields Surge Since The BoC Rate Cuts
- The GoC 5-year bond yield is witnessing a significant increase, spelling trouble for fixed-rate mortgages.
- The yield has surged by 4 basis points (bps) since the morning, reaching 2.97% by midday.
- Over the past three months, yields have elevated by 30 bps, indicating an increase in borrowing costs for buyers.
The implications of these changes might seem trivial to those outside the finance realm. For instance, a 19 bps rise in the lowest 5-year fixed-rate mortgage could reduce max leverage by 1.9%, leading to 4.7% more interest payments over the term. While these numbers may appear small, they could equate to an additional month of work for a household earning $100k annually.
Canada’s Lowest Fixed Rate Mortgages Climb Sharply
- Although the 5-year fixed-rate mortgage remains steady, other terms are on the rise.
- Data from mortgage comparison platform WOW illustrates an increase in conventional fixed-rate mortgages for various term lengths.
- High-ratio loans have also experienced a surge in rates, signaling a significant shift from past trends.
The recent spike in GoC bond yields marks a substantial departure from the previous year. Despite a slight pullback, the yield on the 5-Year bond has risen sharply year to date, underscoring a trend towards higher rates.
Yields are influenced by a myriad of factors, primarily revolving around inflation expectations and liquidity. The recent inflationary concerns, coupled with liquidity issues, have propelled yields higher, reflecting investor sentiments and future expectations.
In conclusion, while the BoC’s rate cuts aimed to stimulate the economy, the current trajectory of bond yields indicates a different outcome for mortgage rates. As investors remain cautious and demand for credit surges, borrowers might have to brace themselves for higher borrowing costs in the near future. Stay informed and prepared for potential changes in the mortgage market to make informed financial decisions.
