What's next for fixed mortgage rates in Canada?

  2/8/2023 |   SHARE
Posted in Real Estate News by Anthony (Tony) Barone | Back to Main Blog Page

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A recent dip in GoC bond yields has provided some welcome relief – but more twists and turns could be ahead

Much attention has been focused in recent weeks on the Bank of Canada’s interest rate hikes and how they impact variable mortgage rates in Canada – but five-year Government of Canada bond yields have also been on a noteworthy journey of their own with significant implications for fixed rates.

A key benchmark for the level at which lenders set their fixed-rate borrowing costs, the yield on that five-year government bond hovered around the 3.2% mark at time of writing. That was up by nearly 50 basis points since mid-January, but still notably lower than its 2022 peak, 3.856% in October.

Fixed mortgage rates have ticked downwards as a result, and slowing inflation – coupled with the Bank of Canada’s belief that further hikes to its benchmark rate may not be required – has spurred some market optimism that fixed rates could stabilize around their current level.

Ryan Sims, a mortgage agent with TMG The Mortgage Group, told Canadian Mortgage Professional that 2023 was still likely to see the five-year bond yield flit between two points, with a possible bottom of around 3% and a peak of 3.5% to 3.6%.

Of particular interest in recent weeks, he added, has been how susceptible the Canadian bond market has been to economic news and updates from the United States, with significant movement in the wake of developments such as a huge US jobs surge in January.

“Last week, the US blew out the jobs numbers – 517,000 new jobs created – and the Canadian bond has moved up around 20 basis points in the last two trading days, which to me is just phenomenal,” he said.

“But I think it’s going to be range-bound, and right now we’re on an upward trend. And that’s going to continue to move higher, and then all of a sudden, some data will come out that will disappoint, and you’ll see 25 or 30 basis points drop off the five-year bond. I think you’re going to see those bond yields be pretty range-bound and react to every little piece of data.”

Fixed vs. variable: What’s the best rate type for the year ahead?

The recent drop in bond yields has provided some welcome relief for borrowers looking to lock into a fixed rate, although Sims said brokers, agents, and the general public shouldn’t lose sight of the fact that rising bond yields are generally a good thing, meaning that the economy is in robust shape and can handle higher interest rates.

“I would rather have these rising rates than I would go back to the days of COVID when we had to cut rates,” he explained. “But I think agents have to be having conversations with their clients about what their objectives are by choosing that rate.”

Whether an agent or broker recommends a fixed or variable rate should depend on where they believe those options are likely to lie somewhere down the line, he added, rather than on their willingness to rush into the better option at the current time.

For instance, while five-year fixed rates at certain lenders spiked to 5.99% in the fall, some borrowers chose to lock into those offerings because variable rates were on the rise and set to continue moving upwards in the ensuing months.

The best course of action in that case, according to Sims, may have been to ride out the variable until fixed rates started to drop, giving borrowers a more favourable rate to lock into on the fixed side.

“The difference [was] between locking in at 5.99% last fall out of sheer panic and emotion versus locking in at 4.25% today, which, by the way, could still drop,” he said. “One hundred and seventy-five (175) basis points is not insignificant.

“So I think we maybe have to look not at variable and fixed as what they are, but what they could represent to our clients in a month, three months, six months, or 12 months from now.”

How much will the Canadian bond market follow the US in 2023?

For Sims, 2023 could see the paths of the Canadian and US bond markets diverge, despite the Canadian market traditionally rising and falling in line with its southern counterpart.

“I think the big story on bond yields for this year will be eventually, people are going to realize that the US and Canada will decouple a little bit and I think bond yields will stop being driven so much by US data,” he said.

“Everyone is treating the Canadian bond market as a proxy for the US bond market, and I think as we get deeper into this year, you’re going to start to see that [decoupling], which means the Canadian bond market will trade more on Canadian fundamentals than American fundamentals. I think that’s a good thing.”

Source: Canadian Mortgage Professional

Bank of Canada, Bank of Canada Benchmark Rate, Canada Real Estate, Fixed Rate Mortgages, Mortgage Consumers

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