Declining bonds lead to lower mortgage rates

In today’s housing market, rising home prices and mortgage rates make home ownership prohibitive to many people. But the performance of government bonds could bring some good news to those carrying a mortgage.

The CBC reports that fixed mortgages rates have been on the decline recently, which has significantly lowered the costs associated with mortgage financing. Five-year government bonds are the primary of source for money made available for loans by banks and other sources, and they have been in a state of decline since late last year.

A new low for government bonds

Five-year bonds issued by the Canadian government were only returning 1.45 per cent in earnings on March 25. This represented the first time since the summer of 2017 that yields of under 1.5 per cent were reported.

The performance of government bonds resulted in an extremely rare occurrence – a reversal on the lending front. The potential earnings curve for short-term versus long-term loans inverted, painting a picture of a declining economy for investors.

Bad news for bonds, good news for mortgages

Despite that, the news of falling financing costs is a haven for mortgage seekers. The performance of bonds are a deciding factor in banks’ decisions to slash their mortgage rates, and lower rates are more likely to attract prospective borrowers. The Royal Bank’s five-year posted rate dipped to 3.74 per cent in January, which forced the other major banks into a scramble to drop their respective rates to remain competitive.

RBC’s rates have since dropped by 10 basis points on March 1 and by a further 15 on March 13, resulting in a five-year fixed mortgage rate of 3.49 per cent. The falling rates have even affected smaller lending outfits, with Dominion Lending Centres offering a locked-in rate of 3.29 per cent and HSBC Canada touting a rate of just 3.24 per cent.

Variable rate products also affected

The majority of Canadian homebuyers opt for a fixed-rate mortgage, as the interest rate is less susceptible to fluctuation and is far more secure as a result. But the drop has also affected variable rate mortgages, with some banks and lenders offering rates under 3 per cent.

While the performance of fixed-rate mortgages is dependent on the performance of the bond market, variable rates are more reliant on the Bank of Canada. Experts believe that the Bank of Canada will eventually decrease its own rates rather than increase in an attempt to jump-start economic growth.

Springtime performance a key indicator

The arrival of spring not only brings forth fairer weather conditions; it’s also a call-to-action for prospective homebuyers. An increasing amount of homes are purchased in the springtime, inciting traditional and alternative lenders to step up their game and offer lower rates.

If mortgage rates continue to remain low, an increasing amount of buyers will be lining up to lock in affordable rates for their first homes. The increased business may help lenders to offset the decline of government bonds.