It appears that an era of consistently low mortgage rates with no significant prospects for increases is about to come to an end. At least for long term fixed mortgage rates.
Mortgage rates are directly tied to the market yield for government bonds of similar duration, and a significant economic stimulus program is beginning to wind down.
The US Federal reserve began a bond purchase program in November of 2008 keeping demand up and yields low. The program has been successful with successive iterations, dubbed QE2 and QE3, keeping fixed rate mortgages in record low territory for the past 5 years. Although this is a US intervention, it’s consequences are far reaching and has direct impacts on Canadian bond yields and fixed mortgage rates.
With the US economy now showing signs of life, the Federal reserve is beginning to unwind it’s quantative easing (QE) program. Just last month Ben Bernanke, head of the Federal Reserve, announced that they would begin to slow their purchase of bonds. A move dubbed tapering by financial pundits.
The change in policy implies that the US government is confident that the economy is beginning to rebound and is in less need of government intervention. The expectation is that the tapering will continue until the program completely ends in December of 2014.
The end of the quantative easing program signals an end to record low fixed mortgage rates. In fact you can expect modest increases to 5 year fixed mortgage rates through 2014. These increases shouldn’t exceed .50% to 0.75% before the end of the year and won’t in themselves have a significant impact on the residential mortgage market.
If you are thinking about locking into a 5 year fixed rate mortgage then now is the time to do it. The forecast for 5 year fixed rate mortgages in 2014 is nowhere but up.