Fixed mortgage rates have been steadily increasing for months now, causing concern for potential homebuyers and those with mortgages approaching their renewal date.  

However, there is finally some light at the end of the tunnel.  

There has been downward pressure on fixed mortgage rates which has been continuing for almost six weeks! 

The last time we saw a run of downward pressure was back in March, which resulted in fixed rates dropping by roughly 0.50%. But that was due to market panic following the collapse of Silicon Valley Bank in the US.  

Now it’s downward pressure streak – round two!  

Bond yields continue to decline, which will drag fixed rates down with them. Unlike the streak back in March, there is no big piece of news rattling the financial markets to initiate the dive. This time, it’s purely on economic data that supports the fall of inflation… which puts us in a very good position.  

While downward pressure continues on fixed mortgage rates, there is room for lenders to come through with a respectable drop, and they don’t need to wait for more downward pressure for it to happen.  

Then why are they waiting to drop rates?  Maybe they’re waiting for Christmas? Well, good timing! 

 

The Influence of Bond Yields on Mortgage Rates 

To fully comprehend the dynamics of fixed mortgage rate pricing, we need to look at the intricate relationship between bond yields and fixed mortgage rates. When bond yields are on an upward trajectory, mortgage rates tend to follow suit.  

Conversely, when bond yields decline, mortgage rates generally decrease as well.  

But this doesn’t mean that rates will always move directly in line with bond yields.  

If that was the case, we’d see multiple rate changes every single day. That will definitely make your rate shopping experience a bit more challenging! But no need to search everywhere under the sun trying to find the lowest rate on the market. This is something that we’re very serious about and are always monitoring for our clients. We do the shopping for you, so you don’t have to. Time is money, and we’ll save you loads of both! But I digress. 

Mortgage lenders generally price their fixed rate mortgages between 1.00 to 2.00% over the bond yield (or as tight as 1.25% to 1.50% in a stable, healthy market). At the time of writing, the bond yield is at 3.62%, which would mean 5 year fixed rates should be in the range of 4.62% to 5.62%.  

The lowest 5 year fixed rate for an insured mortgage is currently 5.29%. While it’s in the top half of the range, it’s at least within it. That rate is also available for purchases under $1 million with a down payment of 35% or greater. But these represent the absolute lowest pricing categories on the market, and they’re still in the top half of the range.  

5 year fixed rates in other categories range from 5.59% to 5.99%… and everything in between. Above the 2% threshold.  

This means that mortgage lenders have the room to not just drop their rates… but to drop them significantly.  

So what’s stopping them?  

There are a few factors at play that can result in lenders keeping their rates artificially high. Sometimes they’ll price in an additional risk premium, which can be due to market volatility, sentiment, and overall cost of fund acquisition. This can all be reflected in a lender’s rates.  

The current last rate updates we received from lenders was 1-2 weeks ago, depending on the lender. Bond yields have fallen nicely since then, so it’s likely that we’ll see some drops to fixed rates in coming days.  

 

Impact on the Real Estate Market 

Many prospective homebuyers are eagerly anticipating a drop in mortgage rates. The current market is experiencing a significant buildup in pent up demand, and the more fixed rates drop, the more it will build. We can then expect a surge of buyers returning to the market.  

With the projected drop in rates next year, it appears that now would be the ideal time to purchase a new home or condo. It might be a good idea to request a longer closing of up to 120 days. This gives more time for rates to fall. While anything can happen and there are no guarantees, it’s likely that rates will be lower four months from now than they are today.  

However, those who continue to wait for rates to bottom out may find themselves facing formidable challenges, repeatedly losing out on property bids and ultimately paying a considerably higher price for their new home.  

It’s great to save a few hundred dollars on your mortgage payment, but not if it comes at the expense of paying $200,000 more… and THIS is what I expect to see happen. It’s just a matter of time. Check out my blog on The Trap of Waiting for Lower Rates to Buy a Home where I discuss this in detail.  

 

Conclusion 

The falling of fixed rate mortgages can present a world of possibilities for homebuyers, real estate investors, and homeowners. Whether you’re refinancing your current mortgage, diving into the housing market, or have a mortgage renewal approaching, lower rates can be a game-changer.  

Fixed mortgage rates are finally dropping, and it’s possible that this could be the beginning of the big rate drop we have been waiting for. Possible, but not certain. All it takes is one piece of news that can reverse the trend and push things back in the opposite direction. But things are looking good.  

Time will tell and anything can happen.