We’ve probably spoken to a dozen people in the last week who want a fixed-rate mortgage but don’t want to apply until the Bank of Canada meets March 3. The thinking is that the BoC announcement will cause fixed rates to fall.
We’re used to seeing this psychology with variable-rate shoppers but not with fixed rates. As such, it’s worth examining further the linkage between the Bank of Canada and fixed mortgage rates.
As many know, the BoC sets Canada’s overnight target rate. This in turn influences prime rate, which directly affects variable rates.
Fixed rates are a different story. Fixed rates are driven by bond yields (usually, that is—the last few quarters have been atypical). The Bank of Canada has no direct control over bond yields, although it can influence them in certain ways.
The fact that bonds are independent from the Bank of Canada is something many don’t grasp. For example, the entire country might expect the Bank of Canada to cut rates 1/4% on March 3, but if stronger-than-expected economic reports precede the BoC announcement, bond yields could jump. In that case, fixed mortgage rates could increase while variable rates fall. (We’re not saying that will happen this time. It’s just an example.)
So how much do fixed rates really follow the Bank of Canada’s lead? According to TD, “for every percentage point of central bank easing (for example), the 5-year yield should decline by 70 bps.”
We ran our own tests and found the correlation between prime rate and 5-year bond yields to be 69.5% over the last 10 years. So, a fair amount of time, bond yields will deviate from prime rate.
That makes sense because 5-year yields are driven by demand for long-term funds while prime rate is linked to demand for short-term funds.
The chart below illustrates how the direction of 5-year yields and prime can differ drastically over 3-6 month timeframes.
In sum, bond yields and prime rate (and fixed and variable rates) do move together long-term. But short term, anything can happen.
So. Should fixed-rate mortgage shoppers wait until the Bank of Canada’s rate announcement before locking in?
In our view, no. It’s just a gamble.
There isn’t much foreseeable to gain by doing this unless one feels strongly that the Bank of Canada will scare the market with a dire economic forecast…and drive down bond yields.
Most folks in this boat are simply trying to outguess the market, which no one can do consistently. Moreover, they’re disregarding the fact that fixed rates are already at historic lows.
Why bother with greed-driven chance taking when you can lock in now, get assurance that your rate won’t go up, and have the ability to request a downward rate adjustment should your lender drop rates in the next few weeks?
*article reprinted from canadamortgagetrends and remains property of canadamortgagetrends
Here are a few of my favorite past articles from my Lethbridge real estate and mortgage blog you might have missed or wish to recommend them to a friend.
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Mortgage Guidelines Get Tighter - Harder and harder to borrow money
Is Your Mortgage Company Out of Business in 2009? - What to do when your bank goes broke
What is wrong with MLS - Is your info being abused?
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Robert May is a Realtor, as well as the broker and owner of Rainbow Realty of Lethbridge Alberta. He is also a licensed mortgage associate and financing expert with Canada First Mortgage of Calgary Alberta. He has been in the real estate industry since 1993 and offers full MLS real estate services to Lethbridge and surrounding area, as well as mortgage financing, refinancing/renewals, preapprovals, and home equity financing to Lethbridge and Southern Alberta. He can be found online at www.LethbridgeLoans.com
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Robert W May is a Real Estate Broker in Lethbridge Alberta, having now been in the industry for over 23 years. . He was also a licensed Lethbridge mortgage broker and financing expert with Canada First Mortgage of Calgary Alberta for the past 10 years. He is an industry leader always willing to help train and educate others in how to improve their business models for financial and personal benefit.