Fixed mortgage rates in Canada have recently climbed despite the Bank of Canada holding steady on its policy rate. The lowest five-year fixed rate for an insured mortgage has risen to 4.34%, up from 3.94% a month ago. For uninsurable mortgages, the lowest rate has increased to 4.64% from 4.24% over the same period. This rise is driven by bond yields, which influence fixed mortgage rates more than the central bank's policy rate.
The connection between bond yields and mortgage rates is significant because lenders price fixed-rate mortgages based on government bond yields. They add charges for credit risk, hedging, operating costs, and profit. Insured mortgages are cheaper because the default risk is carried by mortgage default insurers. The spread between mortgage rates and bond yields varies by lender.
Over the past 12 months, the five-year bond yield has climbed about 80 basis points, aligning with rising global bond yields. However, the lowest five-year mortgage rate has only increased by about 45 basis points, indicating a narrower spread this year. Lenders may be competing for renewals from mortgages taken out in 2020-21, and they might expect yields to fall if geopolitical tensions ease.
According to Hanif Bayat, CEO of WOWA.ca, a simple rule of thumb is to take the average five-year bond yield over the past two weeks and add 0.8 to 1.0 percentage points. If yields hold, mortgage rates may rise further; if they fall, relief will likely come more slowly than the increases did.