Money Matters Toronto

Canadian 5 yr bond yields +0.03bps to 2.68- Four weeks ago it was 2.45%. The spread, based on 5 yr fixed rate mortgage of 4.39%,  is at 1.71%.

Pressure on fixed 5 year: Up.
Financial Post – Markets

Lenders typically like to keep a spread of 1.80% to 2.00% between their fixed five year rates and the current 5 year bond yield. If the bond yield increases then the spread will shrink putting upward pressure on mortgage interest rates. The reverse is also true. If bond yields decrease then the spread widens and there is downwards pressure on fixed rate mortgages.

Canadian 5 yr bond yields -0.03bps to 2.65- Four weeks ago it was 2.45%. The spread, based on 5 yr rate of 4.39%,  is at 1.74%.

Pressure on fixed 5 year: Down.
Financial Post – Markets

Lenders typically like to keep a spread of 1.80% to 2.00% between their fixed five year rates and the current 5 year bond yield. If the bond yield increases then the spread will shrink putting upward pressure on mortgage interest rates. The reverse is also true. If bond yields decrease then the spread widens and there is downwards pressure on fixed rate mortgages.

If you are tossing and turning every night trying to figure which way mortgage interest rates are moving join the club. My impression is that nobody knows exactly which way rates are moving and what the long term trend is. I certainly wouldn’t rely on the sound bytes that come out of the media on a daily basis… you’ll drive yourself crazy!

Take this morning’s paper. The Globe & Mail and Toronto Star each ran an article in their respective business sections about mortgage interest rates. In the Globe & Mail article the author interviews an Ottawa mortgage broker about what he is personally doing. The broker is locking in his ridiculously low variable rate mortgage to curb the risk of higher rates in the future due to inflation.

Then you read the Toronto Star article where numerous economists are interviewed about their predictions for the future. They feel that the recent increase in fixed rate mortgages due to an increase in bond yields was an over reaction by bond investors and that we are certainly not at a critical point where rates will be increasing with speed. We are still far away from inflation and the high interest rates that are associated with it.

My feeling echos that at the end of the Star article… take your time before making any rash decisions. If you are in a variable, have a good long look before you give up your low effective rate. Just because rates have increased doesn’t mean that they won’t come back down. If you are in the market for a new mortgage you may still want to consider a variable because there exists the potential for fixed rates to decrease again… maybe not as low as we saw two weeks ago. If you are really on the fence consider a product like the Merix 50/50 mortgage where you get half your mortgage as a fixed mortgage and the remainder as a variable.

Do you have a question about your mortgage?  Tridac Mortgages has been helping clients for over 30 years. Call our Toronto office at 416.461.0204. Chris Molder. We’re here to help you.

A couple of days ago one of our readers responded to our post “How Are Fixed Mortgage Rates Determined?”. He asked me: what should he really be looking out for when it comes to protecting himself from mortgage rate fluctuatations?

I responded….there are so many factors to consider and even economists who dedicate their whole lives to predicting the direction of markets and behaviors of investors can’t figure it out. There is no “silver bullet” in regards to knowing where fixed 5 year mortgage rates are headed. If you are really interested in determining where rates are headed and you want to put your energy into it here is what I would do:

1. At least once a week visit a site like the Financial Post and have a look at the Canadian 5 year bond yield and pay attention to trends. Today the yield is 2.64%… As I mention in my previous blog post the mortgage lenders like to keep a spread of between 1.70% to 1.80% from the bond yield when it comes to the fixed 5 year price. So today the bond yield is 2.64% + 1.80%=4.44% …. currently lenders are offering 4.49%. If this trend continues there will be downward pressure on the fixed 5 year rate.

Continue reading Responding To Mortgage Rate Fluctuations

Bond Yield VS 5 Year Fixed Rate

Canadian Bond yield versus the 5yr fixed mortgage rate from February 13th, 2009, through to June 12th, 2009. It was published by the Canadian lender Merix Financial.

The bond yield, or rate of return on your bond, is depicted by the blue curve on the graph above while Merix’s fixed 5 year is the green curve. As a consumer, if you want to know which way fixed rates are moving you want to pay attention to the spread between current fixed rates and the bond yield. Mortgage lenders set their fixed 5 year based on a spread between 1.70% to 1.80%.

So, if we look at Merix’s fixed 5 year rate of 4.49% and compare it to the current bond yield of 2.71% the spread is 1.78%. That’s right on target (4.49-2.71=1.78).

What you need to watch for is if their is an increase in bond yields then the spread will continue to shrink and that could cause interest rates to rise.

In summary: Canadian 5 yr bond yields -03bps to 2.71- Four weeks ago it was 2.21. The spread, based on new 5 yr rate of 4.49%, is back in the target zone at 1.78%.