For well over a year now Jim Flaherty and Mark Carney have been singing to the same tune. Mortgage rates will be rising and homeowners need to prepare themselves for increased payments. Flaherty, Canada’s federal finance minister has recently tightened mortgage rules 3 times and has added an artificially high qualifying mortgage rate for anyone interested in a variable mortgage rate. Carney, governor of the bank of Canada (BOC), has been using language suggesting increases will be coming to the overnight lending rate, but in reality has made few adjustments.
It’s unclear if this song is meant to prepare Canadians for economic corrections or if they’re trying to manage macroeconomic factors like total consumer debt levels and average home prices through rhetoric and fear. Either way the Canadian culture has always exhibited caution and prudence. The hot housing market is simply a result of strong demand, good employment and low interest rates.
While Carney has direct control of the overnight and resulting prime interest rate, he has little to do with 5 year fixed mortgage rates. In today’s market the vast majority of borrowers are prudently avoiding the risk associated with variable rate mortgages and are locking in with 5 year fixed mortgage rates. 5 year fixed mortgage rates are tied to Canadian 5 year bond yields. These yields represent the cost of funds by the banks and mortgage companies providing the mortgages. Current bond yields are at 1.79%, giving mortgage lenders a margin of 1.40% to manage their costs and provide for some profit. Lenders typically look for a margin of 1.35% to 1.55%.
5 year fixed mortgage rates are as low as they have ever been and there is no upward pressure suggesting rate hikes are coming anytime soon. Economies around the word are floundering and corporate money is looking to keep assets parked in safe havens. Other than buying gold, buying Canadian bonds is a smart-safe move for large scale investors. Demand for the bonds increases the priced and keeps the yields down. This scenario isn’t likely to change anytime soon. Now’s a great time to leverage your home to pay-off higher interest debt, build that addition or take that trip you’ve always dreamed of. Just be sure to lock in your mortgage rate for a 5 year term and don’t forget to change the station. It’s time to listen to a different tune.