Why are Canada's mortgage rates climbing?
The rates on home loans are being nudged higher by a steadily rising yield, or interest rate, on Canadian five-year government bonds. Last year, that yield — which tends to set the pace for mortgage rates — tumbled as low as 0.32%. Recently, it's been around triple that level.
Analysts say the steeper bond yield reflects growing optimism among investors, who are pulling money out of relatively safe bonds and pouring it into stocks, which carry more risk. The weakening demand for bonds is causing bond prices to fall and yields to go up.
Because bond yields fluctuate based on market conditions, further increases are not only possible but may be likely as more people are vaccinated and investors feel even more encouraged about the economy's prospects.
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How are mortgage rates rising?
Big banks including TD Bank and National Bank of Canada have increased rates on some mortgages, according to Reuters. Rates have reportedly gone up 15 to 25 basis points; a basis point is one-hundredth of 1 percentage point.
The higher rates mean higher monthly mortgage payments.
Here's an example of how that works: The buyer of a typical $530,000 Canadian home who made a 10% down payment could have recently bagged a five-year fixed-rate mortgage at a low 1.39%. Amortized over 25 years, the loan would have cost the borrower $1,941 per month.
But today, that buyer might land a loan 15 basis points higher: 1.54%, instead of 1.39%. The mortgage payment would be $1,975 — an increase of $34 a month, or $408 a year.
How the Bank of Canada is responding
The rates on home loans and other interest rates throughout the economy have been at rock bottom with help from the Bank of Canada's move in late March 2020 to slash its benchmark rate to just 0.25%, matching an all-time low.
As mortgage rates begin to edge upward, borrowers can take some comfort in the fact that the BoC doesn't plan to rates anytime soon.
Despite signs of "excess exuberance" in the economy, including record-high home prices, Bank of Canada Governor Tiff Macklem says the central bank is sticking to its plan to keep rates low until unemployment and other economic indicators recover from the effects of COVID-19.
"We need to watch things very closely, but I’m not recommending new measures right now," Macklem said in late February during a remote address to the Calgary and Edmonton chambers of commerce.
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This could be a smart time to lock down a rate
Even with the BoC’s insistence that it won’t be raising rates any time soon, many observers believe mortgage rates in Canada seem poised to rise.
"The surge in interest rates would undoubtedly stall or reverse if we see a third wave of new variant COVID cases in advance of a full rollout of the vaccines in Canada," says Sherry Cooper, chief economist at Dominion Lending Centres, in a recent report.
But Cooper adds that "an ultimate rise in interest rates cannot be far off," given rising oil prices and government actions to stimulate the Canadian and other economies.
So if you’re looking to purchase a home, try to lock a low rate now because you’ll be able to hold onto it for up to 120 days.
But first, you'll want to check your credit score to make sure it's strong enough to impress a lender. If not, you need to pay down some debt and take other steps to lift your score to where it needs to be.
If you're already a homeowner and are considering downsizing — or trading up — be ready to act quickly if you find a new house and a mortgage rate to your liking. A compnay like Properly can help you avoid the stress of buying a new home before you sell your current one.
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