Fixed mortgage rates in Canada have been marching higher over the past couple of weeks, led by a rise in funding costs for mortgage lenders.
The main culprit is rising bond yields, which typically lead fixed mortgage rates. Since early February, they’ve risen to a near-12-month high, peaking at nearly 1.00% before falling back to around 0.92% as of this writing.
That had the effect of raising the cost of money for lenders, which had to pass that cost on to borrowers.
Over the past two weeks, dozens of lenders have hiked rates, including the Big 6 banks. Increases have ranged anywhere from 0.20% to 0.30%.
The big question on the minds of borrowers is whether this run-up in rates will be sustained, or if it’s another temporary blip, similar to what we saw last spring when rates starting rising briefly due to liquidity concerns.
Economists at CIBC suggest that weaker economic data in the first quarter of the year, due largely to increased “COVID-control measures,” will keep yields from rising much more in the near term.
Should rates continue to rise, that could become problematic for mortgage borrowers, even if it’s short-lived, CIBC’s chief economist, Ben Tal, told BNN Bloomberg.
“…If we see another 30-, 40-, 50-basis-point increase in rates, that will be translated directly into mortgage rates in Canada,” he said. “I would be very concerned, because this market is not ready for a brief 100-basis-point increase in mortgage rates…”
This isn’t a uniquely Canadian story, as yields are also on the rise in the U.S. and around the world.
“This bond yield surge is a global phenomenon that is primarily underpinned by the belief that U.S. inflation is about to sustainably rise,” wrote TMG broker Dave Larock of Integrated Mortgage Planners. “If that happens, the U.S. will export its rising inflation through trade, and it will permeate the globe.”
As Fixed Rates Rise, Variable Rates Are Falling
As lenders have been raising fixed rates, they’ve also been dropping their discounts on variable-rate mortgages. The average discount from prime for a 5-year variable is now a full percentage point, which has brought many 5-year variable rates down to around 1.45%.
But with expectations for the Bank of Canada to begin hiking rates within the next year or two, most borrowers seem to be favouring the security of fixed rates.
Rates Are Still Low…For Now
Despite the run-up in fixed mortgage rates, there are still deals to be had for those who act quickly, since rates are bouncing off historic lows.
Consider that just two years ago, the lowest nationally available 5-year fixed rate was more than 3.00%. Today, you can still find many terms available for under 2.00%.
To put that in perspective, on a $350,000 mortgage with a 25-year amortization, the difference between a 5-year fixed rate at 2.00% vs. 3.00% works out to a monthly savings of $174.28, or more than $16,422 over the 5-year term.
If you’re shopping for a mortgage or plan on refinancing and these recent rate movements have you confused about which product is best for you, don’t hesitate to contact me and I will explain your options and help you make an informed decision.