Canadian Mortgage Rates Set To Rise As Lender Margins Collapse

Government of Canada bond yields made an abrupt surge yesterday, extending a trend that kicked off in February. Despite the aggressive rise, mortgage rates haven’t climbed with them as expected. A Big Six bank says lenders are absorbing the shock and it’s not sustainable. They’re warning investors that mortgage rates will begin to climb soon, worsening affordability for the first time in 3 years. Canadian Bond Yields and Mortgage Costs The real estate industry pays a lot of attention to the Bank of Canada’s (BoC) overnight rate, but that only impacts variable rate mortgages, a minority of the market. The vast majority of borrowers use fixed terms, which are determined by bond yields of similar terms. The most important example when it comes to Canadian fixed rate mortgages is the 5-year bond yield, which determines the interest paid on a 5-year fixed rate mortgage. Credit is a market where all borrowers compete for capital, where the highest quality borrowers are the cheapest as they present the least relative risk. In this case, it’s the currency issuer—the Government of Canada (GoC), whose bonds set the base cost of borrowing, known as the benchmark yield. All other issuers of si...