April 22, 2022 SEP Dev

How do government bond yields relate to mortgage rates?

Like many people, you might be wondering “how do they determine fixed mortgage rates, and what makes them move up or down?”. The answer to this question is quite simple à Government Bond rates/Yields and more specifically the 5-year government bond rates.

Unlike Variable mortgage rates which are positively correlated to the Prime Lending rates, Fixed rates are positively correlated with the bond market, and it wouldn’t surprise you why that is the case. If an investor is given a choice between investing in government bonds that are considered 100% risk-free vs Mortgages that carry a variety of different risks, at the same interest rate, which one do you think they would go with? Since Mortgages have underlying risks that the investor must consider, the rate of return needs to be more lucrative than other investment opportunities, especially those that are risk-free such as Government bond yields.

Now we won’t get into what makes the bond yields themselves move up or down, but the point is that fixed Mortgage rates are typically dependent on the 5-year government bond rates, especially when they rise, where the fixed mortgage rates will always outpace the Bond yields to mitigate the risks associated with mortgage lending. It’s worth noting that although this relationship exists, mortgage lenders seem to be inclined to increase rates faster when yields rise rather than decrease them when bond yields fall….Banks am I, right? And don’t worry they behave similarly when it comes to variable rates and their relationship to the Bank of Canada’s key interest rate, but that’s a topic for another time…

That’s it in a nutshell, but if you would like to learn more about Fixed mortgages and what might be most suitable for you, feel free to give us a call – 905.455.5006

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