As we move into December, fixed mortgage rates have now reached their highest levels since 2010. The big banks recently increased 5 year fixed rates to 3.94% to 4.04%, with most other mortgage lenders increasing rates since mid-November. There are however 5 year fixed mortgage rates still available from 3.44% – 3.74%, depending on your situation.

As fixed mortgage rates are very closely related to bond yields, they will typically follow them. If the yields start to rise, then this puts upward pressure on fixed rates. If they start to fall, then downward pressure is applied.

This is not to be confused with prime rate, which affects variable rate mortgages only. When you hear about a rate increase coming from the Bank of Canada, this would affect variable rates only, but does not have any direct impact on fixed mortgage rates.

The recent rate increases have come in spite of decreasing bond yields, which is an extremely rare situation. Fixed mortgage rates should be going down, but that isn’t the case. They are moving in the opposite direction. The reason for this is that banks have been operating on thinner margins for most of the year, which are related to mortgage regulations that was introduced in late 2016 and 2017. These regulatory changes have led to a very strange time in the capital markets industry, which in turn affects mortgages. Lenders have struggled to remain profitable ever since. Contrary to popular belief, the rate of interest you are paying on your mortgage is not the lender’s profit. Their margin is substantially slimmer, and is just pennies by comparison. 

A lender’s profit is closely related to the spread between your mortgage rate and the bond yield, so a widening spread between mortgage rate and bond yield will result in higher profit for them. Since they have been operating on very thin margins for most of the year (if any margin at all), they are looking to make up lost profit as we round out 2018. 

As we head into 2019, lenders will continue looking for ways to maintain profitability, so it’s unlikely we’ll see any major rate drops at the start of the year.  However, it is likely that we may see some lenders introduce some rate specials, so there may still be opportunity to pick up a deal. That is, if the bond yields remain at current levels.

The long term outlook for fixed rates is that they will continue to increase.  So even if they do drop in January, we can expect them to trend back up throughout the year. It’s likely that we will see less correlation between bond yields and fixed mortgage rates throughout 2019.  By the end of 2020, 5 year fixed mortgage rates can be expected to reach the 5-6% range.

 

Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank – How to Win The Mortgage Game in Canada, and has ranked as one of the top 75 mortgage brokers in Canada since 2016.  He was a finalist for Mortgage Broker of the Year in 2018, and can be seen as the exclusive mortgage broker on season two of TV’s Top Million Dollar Agent.