The last guidance from the Bank of Canada suggests that mortgage rates are going to stay low in the near term meaning the next 12 to 18 months. A couple of important indicators, especially in the fixed rate market suggests that there is a distinct possibility that fixed rates will begin to rise and could climb by as much as 100bps (1%).
Quoting heavily from work by Capital Economics Stephen Brown, the National Post discusses fixed rates rising about 50bps (0.5%) this year.
Why is this possibly going to happen and is a reasonable prediction? Two main predictors have gotten more expensive of late as economies strengthen as pandemic measures are normalized and vaccination rollouts shake off the what should have been expected logistical challenges of producing and supplying vaccine to billions.
One of the main activities keeping fixed rates low has been the Bank of Canada Quantitative Easing measures to the tune of $4-5 billion a week in Government of Canada bond markets. By actively buying bonds in the open market the Bank of Canada has kept yields extremely low. The strengthening economies though have changed investors risk appetites and investor activity has been enough to shake off the Bank of Canada buying caused headwinds and see yields begin to rise. Both the 5 and 10 year bond yields have risen by 10bps (.1%) in the last week.
On a side note, eventually the Quantitative Easing program will be wound down when inflation hits targets and productivity gaps disappear. This all but guarantees rising fixed rates as bonds are left purely to market forces – although there is speculation that governments cannot actually allow this to happen.
The second indication that predicts a rise in fixed rates is the rise in yield in Canada’s 5-year rate swap. The 5-year rate swap is a good proxy for the bank’s funding costs -so if funding costs are rising then margins are shrinking and if margins are shrinking sooner or later they are going to be pushed back up and the way that will be done is to increase the fixed rate.
Ratespy.ca‘s last few articles discuss both the growth in bond and swap yields and their impact on rates.
What does this suggest? Now is a good time to chose a fixed rate mortgage and possibly consider refinancing your current mortgage to lock in what are currently rock bottom fixed rates for the next five years. Business schools teach you that banks are risk adverse, when borrowing for your home it is perhaps best to be risk adverse also. A fixed rate from a fair penalty lender is the best way to prevent mortgage inspired household finance risk at this time for borrowers.