When fixed mortgage rates change, are you in the dark as to why? Here’s how they work and where they’re going.
If you're a Canadian homeowner or potential home buyer, you're likely familiar with the concept of fixed mortgage rates: once you sign on the dotted (mortgage) line, your rate and payments stay the same during your term length.
But when looking at rates to time your purchase, renewal, or refinance, they can change — and possibly thwart your plans.
Knowing how these rates work may take the stress out of your financial decisions, especially if you care about getting your best fixed rate to save more on your mortgage.
Who sets fixed mortgage rates in Canada?
Fixed mortgage rates in Canada are influenced by many factors, including the Bank of Canada’s overnight lending rate and government bond yields. However, individual lenders set their own rates.
What factors influence fixed mortgage rates?
1. The Bank of Canada overnight rate reigns supreme
The policy interest rate is set for banks to lend and borrow money from each other on an overnight basis. It informs the market for all interest and mortgage rates (directly impacting variable mortgage rates) as lenders adjust their rates based on the cost of borrowing money.
2. Government of Canada bond yields have the most direct influence
Lenders set fixed mortgage rates to compete with bond yields (on similar term lengths), as both are used as a source of income.
Mortgages are more costly for lenders to manage, so mortgage rates are set higher than yields (typically at a spread relationship of 1% and 2%) to offset the cost. For example, if a 5-year bond yield is 3.1%, you’ll likely see 5-year competitive fixed rates set in the 4-5% range.
3. Economic indicators can push rates around
The bond market is the largest financial market, which is reactive to economic factors (such as inflation or GDP growth) in anticipation of higher or lower borrowing costs on the horizon for lenders. So, when bond yields react, fixed rates eventually get pushed up or down in response as lenders absorb the changes.
4. Lender competition (a shark tank full of banks)
You have the power to shop around and compare rates — ideally through an experienced mortgage broker (non-commission-based) who can do the bank-shark-tank diving for you. Lenders have to compete to attract borrowers and often lower rates on a specific or common term (such as the 5-year fixed), despite where bond yields sit.
5. Lenders want to stay financially healthy
Staying stably profitable also plays a role in where fixed mortgage rates are positioned. Lenders experiencing higher costs or lower profits may raise their rates to maintain their bottom lines, especially during economic volatility (which can lead to tightening lending regulations).
How often do fixed rates change?
Unlike variable rates, which can change at set times of the year (at Bank of Canada rate announcements), fixed mortgage rates can move anytime until you lock in with a mortgage.
When bond yields rise enough, rates are usually increased, and when bond yields fall, rates eventually do, too (when banks are convinced the downward trend is substantial enough to lower rates).
Rates don’t move in lockstep with bond yields, so if a lender posts a rate change, you likely won’t see it happen again right away.
Want to see where fixed rates are going? Watch 5-year bond yields.
A 5-year fixed-rate mortgage is the standard term many Canadian homeowners and banks prefer. It’s set by the light of 5-year bond yields, so watching them can help you see when another fixed rate hike or drop may be coming.
You can watch bond yields here and notice how much time it can take for lenders to respond to yield movements with rate changes. Understanding the trends can provide valuable insight to inform your mortgage decisions.
Are you intrigued by bond yields and want to know more? Read here.
What are fixed rates doing right now?
According to Dan Eisner, True North Mortgage founder and chief executive, you can expect current fixed-rate volatility to continue. He explains, “Mortgage rates will swing up and down within a tight range over the next few weeks. The market is looking for direction and can easily be pushed around by the next economic factor, such as the inflation rate, oil price changes, or U.S. bank instability.”
Fixed rates aren’t always this volatile. He observes, “The fluctuations reflect the mayhem caused by the pandemic and the home buying fervour we saw, and right now, the world is trying to get market conditions back to some state of normal. We’re not there yet, so we don’t expect fixed rates to be entirely stable or headed in just one direction.”
See what else Dan has to say in his regularly updated blog, 2023 Mortgage Rate Forecast.
Choose wisely when getting a rate hold — and you could end up with a lower rate.
If you want to time things right to get your best deal, hold your rate with the experienced mortgage brokers at True North. They have access to several lenders, rates and products, plus an in-house lender that regularly outdoes the competition by an average of 0.20%. That way, when it’s time to sign, they can help lower your rate through a volume discount.
A top trusted mortgage brokerage in Canada, True North offers online, over-the-phone, and in-store services to simplify your process. And they have the most 5-star reviews in the industry because they focus on delivering excellent service with their lower rates.
You can probably thank them for all the competition on rates today — Dan Eisner started True North over 16 years ago with salaried, non-commissioned, unified brokers because he felt that Canadians deserve a lower rate and better mortgage.
Watch where fixed rates are going, then contact True North for your best rate choice and unbiased advice to help save you thousands.
The fast, expert mortgage advice you need, with the mortgage rate that saves you the most. Contact Canada's No. 1 Mortgage Broker today.
