Mortgage rates have spent the better part of the past year in near-freefall, with numerous terms setting fresh record lows.
But a couple of weeks ago, rates pulled a U-turn and have been starting to climb higher ever since. And here’s why. Since the beginning of February, 5-year Canada bond yields, which typically lead fixed mortgage rates, have surged. They’ve risen nearly 60 basis points over the past month to a 12-month high.
With funding costs being pushed up and margins being squeezed, lenders could no longer hold rates at those record-low levels.
As for why bond yields are rising—which often coincides with market optimism—the answer is multi-fold.
For one, yields have been soaring south of the border, and when U.S. bond yields move, Canadian yields often follow. Given expectations for rising vaccination rates and ultimately an end to lockdown measures and a return to normalcy, many see greater inflationary pressure ahead, which usually leads to rising interest rates to keep that inflation in check.
Bank of Canada Governor Tiff Macklem addressed rising bond yields in a speech last week. "To some extent, the back-up that we’ve seen in rates reflects the success of the fiscal stimulus, the monetary stimulus, combined with the rollout of vaccines,” he said.
Current Rate Increases Apply to Fixed Rates Only
It’s important to note that only fixed rate mortgage products are currently on the rise. Most lenders have increased rates on several key terms by anywhere from 10 to 30 basis points, again due to higher funding costs.
Variable mortgage rates, on the other hand, take their lead from prime rate, which rises and falls according to the Bank of Canada’s overnight target rate.
That rate is largely expected to remain as is for at least another year, or possibly two.
“We have committed to keeping our policy interest rate at the effective lower bound until economic slack is absorbed so that our inflation target is sustainably achieved," Bank of Canada Governor Tiff Macklem said last week. The Bank has repeated previously that it doesn’t see that happening until “into 2023.”
Keeping Things in Perspective… Rates Are Still at Historic Lows
Despite the recent 10- to 30-bps rise in some rates that we’ve seen so far, it’s important to note that rates are still not far off their historic lows.
Consider that the lowest nationally available 5-year fixed rate was north of 3.00% just two years ago. Today, you can still find many terms available for under 2.00%.
Speak to a Mortgage Broker for More Insight
Are you considering refinancing or looking for a new mortgage and are concerned about rates trending higher? There are still plenty of options available to you, and I’d be happy to review them with you.