If you’re in the market to buy a home, there has never been a better time. History has shown the most popular mortgage term among Canadians is the five-year fixed rate. And coincidentally the five-year fixed rate currently sits at its lowest level in two years. However, the low rate party could be coming to an abrupt end. Fixed mortgage rates are showing signs that they could be inching up in the coming days.
What Influences Fixed Mortgage Rates?
There are two main types of mortgage rates: variable rate and fixed rate. With variable rate mortgages, the mortgage rate is influenced by interest rates set by the Bank of Canada.
This is different from fixed rate mortgages. The rate you pay on a fixed rate mortgage is influenced by government of Canada bond yields. And those bond yields have been heading higher in the last few days.
Government of Canada bond yields are closely linked to the bond yields of our biggest trading partner, the U.S. That shouldn’t come as any surprise. What happens down south in the bond market has a big impact on bond yields in Canada.
To that extend, this has led to a quick rise in government of Canada bond yields. In fact, what makes this spike in bond yields noteworthy is that we haven’t seen this much of an increase over a four day period in over six years.
If you ask economists the reason for the rapid increase, you’d hear a litany of reasons – improving U.S.-China relations, an appetite for risk, optimism on trading, etc. At the end of the day the exact reason doesn’t really matter. All that really matter is that fixed mortgage rates could be on the rise.
What’s Next for Fixed Mortgage Rates?
If you have a fixed rate mortgage and your term isn’t up for renewal for another year or two, what happens this week isn’t really relevant to you, although if it’s the beginning of a trend of rising rates, it could be relevant when your mortgages comes up for renewal.
If you’re planning to buy a home in the near future or your mortgage is coming up for renewal soon, you’ll want to keep a watchful eye on rates. Although rates haven’t started to rise at most lenders (it usually takes a bit of time for lenders to react to the bond market), lenders that are offering the lowest of rates are likely to start increasing this rates sooner rather than later if the trend of rising bond yields continues.
If you’re planning to get a mortgage, but you haven’t quite yet submitted your mortgage application, now would be the time to do so. It’s in your interest to get your mortgage application in as soon as possible. Mortgages rate holds typically last for between 90 and 120 days. But you can’t take advantage of that rate hold until you get your application in.
Is this the beginning of raising rates for all lenders? Only time will tell. Although if history tells us anything, it could be a while until bond yields fall to the lows we saw just a short while ago.
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About the author
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedIn, Twitter, Facebook and Instagram.