Canadian fixed-term mortgage rates could fall to even more affordable levels after roiling financial markets pushed the yield on five-year government bonds to record lows on Tuesday. As investors fled equities in recent days, money poured into the haven of Canadian government bonds, pushing prices up and yields down sharply. Because banks borrow government bonds to help finance their fixed-rate mortgages, there is a tight link between five-year bond yields and five-year mortgage rates.
“We have seen a precipitous drop in five-year bond yields,” said Toronto-Dominion Bank chief economist Craig Alexander, mainly because Canadian bonds look so attractive because of the country’s positive fiscal situation.
Since July 21 the yield on those bonds has dropped a remarkable three-quarters of a percentage point, Mr. Alexander said, hitting an all-time low of about 1.5 per cent on Tuesday.
Five-year mortgage rates tend to move in lock-step with that yield, but about 1.1 to 1.4 percentage points higher, and with a lag of up to several weeks before major lending institutions react with their changes.
“The lag is really about financial institutions assessing whether the movement is going to be sustained,” Mr. Alexander said, noting that the time for them to react varies. In the current volatile market, financial institutions won’t likely move until they see whether bond yields stabilize for a period of time, he said. “There is a distinct possibility of a decline in five-year mortgage rates, but it is not clear [yet] how much of a decline there will be.”
He expects to see a drop in mortgage rates, but perhaps not as dramatic as current bond yield numbers would suggest.
For home buyers, or those looking to renew their mortgages, the prospect of lower five-year mortgage rates is very positive, said Alyssa Richard, founder of the mortgage-rate tracking website RateHub.ca. Five-year mortgage rates, on average, have been at about 3.5 per cent in recent weeks, she said, but if current bond yields are maintained those rates could drop to below 3 per cent, a level not seen before in Canada.
Such a drop would save a home buyer almost $1,200 a year on a $360,000 mortgage amortized over 30 years, Ms. Richard noted.
People holding variable-rate mortgages will also likely get a break, she said. Variable rates – which are linked to the Bank of Canada’s prime rate – will rise after the central bank’s next rate increase. But with U.S. Federal Reserve Board Chairman Ben Bernanke having said Tuesday that he will hold U.S. rates steady for two years, and the Canadian economy growing only marginally, Bank of Canada Governor Mark Carney is not expected to hike rates until next year at the earliest.
For Canada’s real estate market, which has shown some signs of softening, the prospect of even cheaper mortgages could provide a welcome shot in the arm.
“The Canadian real estate market has nine lives,” said Benjamin Tal, deputy chief economist at CIBC World Markets Inc. “Every time it looks like it’s going to slow down, something happens somewhere else in the world and interest rates stay low. The market could have been a lot weaker if not for such things.”
Still, low interest rates can also send the wrong signal to some people, said Louis Gagnon, finance professor at Queen’s University in Kingston, Ont. “Many will enter the [real estate] market at prices that are too high, with very little equity, and they will run into trouble later when rates begin to go higher.”