The Five year fixed mortgage rate has increased by 0.25% over the past week and is no longer flirting with the infamous 2.99% mark. Although the popular 5 year fixed mortgage rate will continue to move erratically, the outlook for the next 6 months is a slight increase of 0.10% to 0.25%.
The 5 year fixed mortgage rate is driven by the 5 year bond rate. These bonds have bounced from their floor of 1.28% in December to 1.95%. 1.95% is still a very low yield by historical standards, but marks a dramatic increase from recent months. The reason for the higher yields is simply less demand for the bonds which is principally driven by more attractive similar bonds in other countries. The driving force for this change is the fact that the U.S. is beginning to post some positive economic indicators and that Europe seems to have come back from the precipice. Although no one is forecasting any economic booms over the next year, most are cautiously optimistic that growth levels are accelerating.
A secondary factor providing upward pressure on the 5 year fixed mortgage rate is the fact that CMHC is approaching its $600 billion ceiling on mortgage default insurance. In an effort to slow its portfolio growth CMHC has indicated that it will start rationing insurance on low loan-to-value (LTV) mortgages. These low LTV mortgage are being insured by major lenders to help reduce their cost of funds. The net effect is that an increase in the cost of funds will put additional upward pressure on 5 year fixed mortgage rates.
Although we are not expecting any dramatic changes, you can expect to see a gradual increase in the 5 year fixed mortgage rate over the next 6 months. As always this increase will be erratic, so make sure you are working with a mortgage professional that can lock in your rate during one of the low points.