Lower bond yields could soon mean cheaper mortgages. Here’s why
With the Bank of Canada offering little hope to those aching for interest rate relief, experts say some Canadians might be able to get a break on their mortgage by paying closer attention to the bond market.
While the central bank sets the benchmark interest rate broadly for Canadians and their lenders, bond yields can have a substantial — if indirect — influence on the rates borrowers pay.
Recent cooling in the bond market over the past month could eventually mean savings for Canadians renewing or taking out a new fixed-rate mortgage, says James Laird, co-CEO of Ratehub.ca.
“It’s exciting that bond yields are coming down, if you require a mortgage in the near-term,” Laird tells Global News.
While variable-rate mortgages rise and fall immediately in line with the Bank of Canada’s target for the overnight rate, fixed-rate products typically use the bond market as their benchmark.
A bond is a traditionally conservative investment tool with a set yield over a particular timeframe. While bond supply is one factor affecting prices, yields also have close links with inflation and the Bank of Canada’s policy rate, and will typically fall when price pressures and the cost of borrowing drop — or are expected to drop.
“It’s all about expectations. That’s what the bond market is predicting,” Laird says.
Banks and other lenders also use bond yields as a basis for what they should be offering on their fixed-rate mortgage products, Laird says, usually with a one to two percentage-point premium on top.
“It’s a bit oversimplified, but people can think of when they get a five-year fixed-rate mortgage that there is a bond in the background,” he says.
The five-year Government of Canada bond yield, which informs that popular five-year fixed
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