Canadian fixed-term mortgage rates could fall to even more affordable levels after railing financial markets pushed the yield on five year government bonds to record lows. As investors fled equities in last week, many poured into the haven of Canadian government bonds, pushing prices up and yields down sharply.
Because banks borrow government bonds to help finance their fixed-rate mortgages, theres is a tight link between five-year bond yields and five year mortgage rates.
Since July 21st the yield on those bonds has dropped a remarkable .75%, hitting an all time low of about 1.39%.
Five year fixed mortgage rates tend to move hand in hand with that yield, but about 1.1 to 1.4 percentage points higher. and with a lag of up to several weeks before major lending institutions react with their changes. We are currently at a 4% spread.
Analyst expect to see a drop in mortgage rates, but perhaps not as dramatic as current bond yield numbers would suggest. And on only knows when. Banks will take their time before dropping this dramatically to see how stable the markets are.
We could easily see 5 year Fixed Rates below the 3% mark, which would be an all time Canadian low.
People holding Variable Rate mortgages will also likely get a break. Variable rates - which are linked to the Bank of Canada's prime rate - will rise after the central bank's next rate increase. But with U.S. Federal Reserve Board Chairman, Ben Bernanke, having said last Tuesday that he will hold U.S. rates steady for two years, and the Canadian economy growing only marginally, Bank of Canada Governor Mark Carney is not expected to hike rates unitl next year at the earliest if not even drop them.