Fixed Mortgage Rates Are Rising - What Is Causing This Upward Trend?
By now most Ontario Homeowners are well aware that we have been experiencing some of the lowest mortgage interest rates, both fixed and variable for well over a year now. This seems rather contradictory, given that we have been neck-deep in the worst pandemic ever experienced in our lifetimes.
Despite catastrophic predictions by real estate professionals that we would see the bottom fall out of the real estate market along with mass default in mortgages, thanks to aggressive Government measures, the worst has not happened.
Quite the opposite actually. Mass default was avoided and housing prices have soared to unprecedented levels along with a very healthy overall number of house sales in Ontario and elsewhere in the country.
According to the Ontario Real Estate Association, residential sales activity reported through the Multiple Listing Service (MLS) in Ontario numbered 13, 885 units in January of this year which represents an increase of 29.5% when compared to house sales the same time last year. This represents a new sales record for January in the Province. The average price of resale residential homes sold in Ontario during January 2021 was a record $ 796,884 rising 26.7% from January 2020.
Bond Yield Is On The Rise - What Does This Mean For Fixed Mortgage Rates?
Up until the last few weeks, interest rates have remained extremely low both on a fixed rate five-year mortgage and a variable rate mortgage. Factors have however converged lately that have pushed up the yield on the five-year Government of Canada Bonds; the bond yield is a direct link to fixed rates.
Although the increase is minimal, it does represent enough of a financial squeeze for lenders to pass this cost onto the borrower rather than absorb the cost of the increase themselves.
What Factors Have Led To An Increase In Fixed Mortgage Interest Rates?
Three factors have converged to squeeze the bond market, forcing an increase in bond yields.
The Welcome news for those in the US about an imminent Government Stimulus package that will help kickstart the economy from the economic strains imposed by the pandemic.
The Threat of rising inflation due to the economic spinoffs of Covid-19 on the economy.
The threat of the housing market becoming too hot which could threaten upward trends in real estate
What About Variable Mortgage Rates?
Thankfully, the Bank of Canada (BOC) has recently announced that there is a commitment to maintaining the overnight bank rate at the same low level. The BOC rate is directly influential on the rate that can be offered on variable mortgages which is of course linked to the Prime Rate of Canada.
Does this mean there will be a mass rush to switch to a variable-rate mortgage? The short answer is the levels that have increased on bond yields remain minimal and not enough to precipitate a move to a variable rate mortgage option. Many borrowers are still more comfortable with a fixed rate mortgage over a variable. That being said, the less than 2% rate on the variable is very attractive for numerous borrowers.
Time will tell just how much the bond yield will increase and what exact effect this will have on the mindset of Ontario homeowners who wish to purchase property or refinance their current mortgages. Like Covid itself, time will determine the direction of mortgage rates. It is safe to say that we are still enjoying interest rates that represent historically low levels.
To answer any further questions, contact me at your earliest convenience. I have access to multiple banks which means I can shop around for my clients to get them the best option.
Take advantage of a robust housing market with rates that are still extremely low!