Fixed mortgage rates are linked directly the rates offered by Canadian 5 year government bonds. These bonds represent the cost of funds for fixed rate mortgage lenders. Already near all-time lows these bond yields took a nosedive last week. This swansong is a direct result of last week’s flow of disappointing economic news from around the word. Abysmal job numbers from the US, a slowdown in China, and a European fiscal crisis with no end in sight are all contributing to gloomy growth forecasts and increased investor risk. The new economic landscape is putting downward pressure on Canadian 5 year fixed rates. Expect a 15 to 25 bps drop in 5 year fixed mortgage rates over the next 30 days.
In times of risk and uncertainty bond investors look for safe havens to park their cash reserves. Canadian bonds offer a safe alternative and are attracting investment from around the globe. The laws of supply and demand have kicked in and increased the price of the bonds which in turn lowers the yields they deliver.
If this drop in yields is just a blip, then mortgage lenders won’t lower their fixed mortgage rates. Instead they’ll wait out the storm while earning higher margins for managing the risk. On the other hand if it looks like the new lows are here for a prolonged stay then the laws of competition will kick in and we’ll see the lenders shaving basis points from their mortgage rates as they look to maintain and grow market share.
At this point is seems quite clear that the low rate environment is here to stay, at least for the medium term. Once the banks and mortgage lenders have accepted the new reality they will gradually begin to shave basis points off the 5 year fixed rate. Lower rates expected in the next 30 days.