A welcome break: Canadian mortgage rates fall as bond yields plunge

Last week, Canada's mortgage lenders cut their interest rates. The move, largely influenced by the recent performance of five-year Government of Canada bond yields, marked a turning point for lenders and consumers alike.

The catalyst for this rate change was the substantial decline in the yield on 5-year Government of Canada bonds, a key benchmark for fixed-rate mortgage pricing. After peaking at 4.42% at the beginning of October, it fell by over 60 basis points to stabilize at around 3.80%. This sharp drop led mortgage lenders to lower their fixed rates.

Despite this trend, the fall in mortgage rates did not entirely mirror that of bond yields. This inequality is largely attributed to the risk premiums that lenders continue to maintain, anticipating possible short-term economic slowdowns.

The risk premium is the additional interest rate that lenders apply to a mortgage loan over the risk-free rate, such as that on government bonds, to compensate for the higher risk involved in granting home loans. This premium is intended to cover the risk of the borrower defaulting and being unable to repay the loan, and varies according to the borrower's creditworthiness and economic conditions.

For those looking for a new mortgage or due to renew soon, this possibility offers the potential for rate relief. However, industry observers warn against a direct correlation between falling bond yields and reductions in mortgage rates. The gradual descent in mortgage rates, compared to the more rapid changes in bond yields, is metaphorically described as rates taking "the elevator up and the stairs down".

The link between bond yields and mortgage interest rates in Canada is essential. Mortgage rates are often aligned with government bond yields, since both are long-term debt instruments competing for the same investors. When bond yields rise, the cost of borrowing on the bond market also rises for financial institutions, and this higher cost is passed on to consumers in the form of higher mortgage interest rates.

Bond yields are sensitive to various economic factors, including inflation, economic growth and the Bank of Canada's monetary policy decisions. These factors also influence mortgage rates, suggesting that a rise in bond yields, possibly due to inflation, could signal an imminent increase in the Bank of Canada's key interest rate, leading to higher mortgage rates.

The impact of bond yields is more direct on fixed-rate mortgages, which are closely linked to the bond market. Variable-rate mortgages, on the other hand, are generally linked to the Bank of Canada's key interest rate, but are indirectly affected by the general economic conditions that influence bond yields.

If you're thinking of renewing or refinancing your mortgage, now might be a good time. Contact Fred & Martin Mortgages today. We'll be happy to dive into your file, meticulously evaluate your options and propose a variety of customized solutions. What's more, it's free and could save you thousands of dollars.

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