More Expensive; Canada’s Mortgages Are On The Way Up Again

Canadian mortgage rates are once again rising, after a temporary decline that boosted home prices. Canada’s 5-year fixed term mortgage rate pulled back during the US banking crisis, helping to boost home prices. Surging government bond yields have rolled back the discount over just a few days. While the fixed term mortgage remains one of the cheapest loan options, that can change within a few days as yields continue to rocket higher.

Mortgages, Yields, and Deposits—Oh My

Credit markets are competitive with yield, term, and risk, determining the cost of borrowing. Variable rate mortgages respond to the Bank of Canada (BoC) overnight rate—rising and falling with it. Fixed rate mortgages move with similar government loan terms, since they’re competing to lock up investor capital for that period.

The most prominent example of the latter is the Government of Canada (GoC) 5-year bond yield. It directly influences the cost of the 5-year fixed rate mortgage, traditionally the most popular mortgage product. It’s actually such a popular mortgage product that home prices reversed course earlier this year, and rose by a similar amount of leverage provided by falling rates from the US banking crisis.

Now rates are back to climbing higher—and fast.

Canadian Mortgages Rates Have A Very Wide Range

Market uncertainty has resulted in a large gap between short and longer-term rates. As of this morning, conventional mortgages (20% down) ranged from 4.99% per year for a 5-year fixed, all the way up to a 5.99% per year for a 10-year fixed rate. These numbers might sound like a rounding error, but the gap between different mortgage terms can mean paying thousands more per year.

For example, let’s say a borrower needed a conventional mortgage and 20% down on a $1 million home. If they opted for a 5-year fixed rate at 4.99%, the payment would be $4,650/month. Opting for a 1-year fixed rate can mean paying $450 more per month, or $5,400 for the year. All to play rate roulette next year, and hope borrowing costs came down.

Not fun.

Canada’s 5-Year Fixed Rate Mortgage May Surge With Bond Yields

As mentioned in passing, the 5-year fixed term mortgage is traditionally the most popular. It also happens to be the cheapest, providing more leverage for borrowers, but that appears to be changing fast. From April to June, the average cost of a discounted 5-year rate has climbed around 0.7 points, due to the bounce in the government bond yield. It’s also expected to surge even higher as bond yields continue to surge higher.

The GoC 5-year bond closed yesterday at 3.757%, the highest close since last October. It added 0.7347 points over the past month, with over a third (0.2626 points) within the past week. With the economy “overheating,” inflation remaining elevated, and more economists pricing in further rate hikes, there’s a good chance that the 5-year fixed rate is going even higher.

Falling rates helped boost demand at the start of the 2020s, and recent cuts also added thousands to home prices. Now that higher rates are hitting the market, it’s fair to expect a little drag on price growth.