Mortgage Rates and Canadian Bond Market
Knowing mortgage rate trends and tracking accurate mortgage interest rate forecasts are important to the home buyers as well as sellers. Being on “the right side of the market” can enhance the profitability of a home sale — or the affordability of a new mortgage or refinance. But because of its complexity, understanding mortgage rate trends may be as much art as the science.
When it comes to fixed rate mortgages they are intertwined with the bonds issued for the same term.
Fixed rate mortgages are determined by taking the current 5-year rate (for example) and adding a spread (the lender’s profit) of between 1.40% and 1.60%. If bond yields go up, the lenders spread will shrink outside of 1.40% and this could trigger mortgage rates to rise. If the bond yield goes down, the spread could increase outside of the 1.60 spread and this could trigger an interest rate decrease.
For example, if the 5-year Government of Canada bonds are trading at 3.00%, 5 year fixed mortgage rates can expect to be between 4.40%-4.60%. The bond yields are determined by investors expectations about where the interest rates will be in the future. If the investors believe that the long-term interest rates are going to go up, this would put a pressure on the bond yields and could cause them to increase.
Using current economic predictions the overnight lending will continue to rise, as you can see below.
source: tradingeconomics.com
Having said that the mortgage rates will most likely head up in order for the lenders to keep their profits.
