Fixed mortgage rates are exploding

There is a lot of noise when central banks announce their rates. You will say that this is normal, because these decisions have a direct impact on the changing prices.

On the other hand, little attention is paid to the rising prices of Canadian government bonds, which affect the development of fixed-rate mortgages, the most popular option among homeowners.

Well, for the past few weeks, they’ve been climbing at a frightening speed!

about 5%

At the beginning of June, the interest rate on five-year government bonds was 2.86%. A week ago it reached 3.58% which is a peak since 2008. We haven’t seen such a rapid increase in thirty years and we haven’t seen the end of it.

Those who swear by the fixed rate will take the leap if they have to renew their loan in the coming months. Five years ago, they obtained financing with an interest rate of less than 3.0%. The best five-year rate for an insured mortgage is now around 4.9%; Most borrowers will pay more than 5%. Next step: 6%!

The link between bonds and mortgages

Canadian government bond prices fluctuate on a daily basis. In an inflationary environment, the investors, those who buy government debt, will demand higher interest. It is the interaction between supply and demand that determines prices. Financial institutions rely on bonds to set a fixed rate for their mortgages. why ? To finance mortgage lending activities, banks resell a portion of their loan portfolio in the capital markets, which are the markets in which they compete with government debt securities.

However, government bonds are 100% safe, which is not the case with mortgages. This additional risk (in addition to the margin held by lenders) is reflected in the rate differential between bonds and mortgages. The difference between 100 and 200 basis points (100 points equals 1%) depending on the circumstances. It was hovering around 120 pips a week ago, it has widened since then and could gain more momentum due to the worrying financial environment.

In other words, fixed mortgage rates are rising a little faster than bond rates, which are already rising at an extraordinary rate. This is not good news for those who will be renewing their loan within the next few months.

Impact on the real estate market

  • Those who are about to shop for a fixed rate mortgage should qualify for the 7% rate! It kills souls…
  • In Canada, the borrower must pass a “stress test”. When evaluating the weight of mortgage debt in their clients’ balance sheets, lenders must add 2% to the granted interest rate. The result: more and more ambitious buyers are being excluded!
  • Last week, Desjardins revealed its real estate forecast, including a 12% drop in prices in Quebec by the end of 2023. Elsewhere in the country, the drop is even more pronounced. The Bank of Canada, in a more dramatic tone, spoke of a correction and the risk of a cascading effect that would weigh on the financial system.
  • Look no further for an explanation: It is the credit crunch that will quiet people’s minds. In the current flow of negative news, it looks like another piece, but this tightening is necessary.
  • Those who went into debt to the extreme to access real estate last year would not see it that way.

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