Variable-Rate Mortgages and Fixed-Rate Mortgages
Variable-Rate Mortgages: These mortgages change whenever the Bank of Canada changes its interest rates. So, if the Bank of Canada lowers rates, the payments on these mortgages will go down right away. But, not many people use these kinds of mortgages. Most people use fixed-rate mortgages, where the interest rate stays the same for a certain period, like five years.
Fixed-Rate Mortgages: These are influenced by bond yields. A bond is like an IOU that governments and companies use to borrow money. The yield is the interest they pay to borrow that money. When the Bank of Canada cuts rates, we expect bond yields to drop, which can lower fixed mortgage rates. But if bond yields don't drop much, fixed mortgage rates won't either.
Why Bond Yields Matter
Usually, longer-term bonds (like five years) have higher yields than shorter-term bonds (like three years) because lenders want more interest for lending money longer. But right now, that's not happening, and long-term rates are lower than short-term rates.
Guessing Future Rates
Let's fast forward a couple of years. If the Bank of Canada is happy with the economy, it might set the rate around 2.75%. This means they might cut rates by 2% from where they are now. Historically, bond yields were about 0.84% higher than the Bank's rate for three-year bonds and 1.12% higher for five-year bonds.
So, if the Bank's rate is 2.75%, three-year bonds might be around 3.64%, and five-year bonds might be around 3.87%.
Current Rates
Right now, three-year bonds are close to 3.80%, and five-year bonds are at 3.43%. This means three-year rates might drop a little, but five-year rates might need to go up.
What This Means for Mortgages
Even if the Bank of Canada cuts rates, it might not make mortgages much cheaper. In fact, longer-term mortgages could even get more expensive.
Indirect Effects
Lower rates from the Bank of Canada might make other loans, like car loans or credit lines, cheaper. This could help people feel more confident about spending money, which could indirectly help the housing market.
So, in simple terms, changing interest rates and bond yields affect mortgage costs, but it's not always straightforward, and sometimes other factors can have an indirect impact on things like buying houses.
Contact The Mortgage Missus Inc. today to learn more!
Tonia Mercer | The Mortgage Missus Inc.
About the author,
Tonia Mercer is an independent mortgage broker. She has been in the industry for 15 years, in 2021 she launched her own brokerage The Mortgage Missus Inc.
Tonia is passionate about financial education and believes that working with independent experts is the best way to get unbiased, professional advice. She has joined forces with local independent home and auto, financial advisor, legal, appraiser and real estate service providers.Effectively creating a concierge service for all things financial and real estate.
Tonia donates a portion of all mortgage revenue to Mercer's Mission, a street dog and cat feeding mission in the Dominican Republic. https://www.facebook.com/mercersmission