Mortgage bond rate update – what increases mean for you

The Canadian mortgage mortgage bond rate is starting to creep up, as someone who is currently interested in buying or refinancing a home in Canada this could mean that mortgage rates are increasing.  This begs the question of  “where do fixed rate mortgage rates come from?”.  Fixed rates in Canada are based upon the lender spread above the mortgage bond rate.  For example, the current mortgage bond rate is 1.2%, with fixed rates in the 2.79% to 2.99% range, the current lender spread (gross revenue) is 1.59% -1.79%.  Typically, lender spreads above the bond have been 1.2% -1.4%, however for the past year they have been 1.6% -2.0%.  This means that for the past year banks have been making a killing on mortgage lending due to their significantly higher margins.

So how might this increase in the mortgage bond rate affect you?

That is a great question, the short answer is in the big picture view it will probably have little real affect on you.  That being said when we see increases in the bond rates lenders typically start to pull back their various lender specials.  As such I would anticipate seeing lender rates in the 2.69% – 2.79% range go away and the norm return back to 2.89% – 2.99%.  My advice to you is not to panic, in the big picture view 15 years ago people would have sold their dog, cat, and Nintendo (power pad and track and field included) for a rate below 3%.

I have included below a chart produced by the bank of Canada showing the bond trends.

Government of Canada marketable bonds – average yield – 3 to 5 year