The past couple of months have been very interesting in the mortgage industry, namely in regards to interest rates.
Interest rates skyrocketed in February to as high as 4.49% for a 5-year fixed (the staple rate of over 72% of Canadian Household Mortgages), and has trickled down this month to a low of 3.59%, only 0.20% off of the lowest 5-year fixed rate that our generation has ever seen.
But alas, it too must come to an end.
There are two different cycles of interest rates, firstly there’s the one that the Bank of Canada sets which is the prime rate and variable rate mortgages, lines of credits, and some credit cards interest rates are set from this standard.
The fixed interest rate, which is preferred by most Canadians for its straightforwardness, is based more so on both the health of the global economy and our own.
The Canadian government bond yield is the primary indicator of where the fixed interest rates sit.
As of June 24th the bond yield dropped to a near one-year low of 2.01%, and with banking spreads (lenders’ revenue margin) preferably to be in the 1.35-1.65% range, rates are right where they should be, 3.59% with a little downward pressure.
Then as no one predicted, June 28 and 29 the bond yield shot up close to 30 basis points, to 2.30%.
The reasons behind the increase have to do with May’s inflation being quite high at 3.7% (when the Bank of Canada’s looking for 2%), Greece’s debt woes are looking to be restructured (unknown at time or writing), Bond traders are taking money off the table after almost three months of aggressive trading and a rebounding stock market as the sale of the bonds are being re-invested into the equities markets.
This may only be a short burst to the bond yield and it may stabilize and trickle back down, but on the other hand any more positive news about the economy and interest rates will rise further.
Banks and lenders aren’t particularly fond of where mortgage rates are at.
In this rate environment it’s difficult to make much money; this is recently proven by two mortgage lenders leaving the mortgage industry, MacQuarie and Concentra.
As much as we think they are making piles of money on the interest we pay to them, we as consumers don’t generally think of what it costs to organize and then fund the mortgage.
Even though the bond yield is the basis for which rates are set, most banks and lenders “rent” their money from you the consumer via your deposits and from large investors, they then funnel this money that they are paying to the depositors and turn them into loans or mortgages.
These days five-year deposit money is paid out between 3.05-3.30% depending on the lender, that money is then lent out at 3.59%-3.79% (as of June 30).
So the actual spread isn’t as high as one thought, but it is at one of the lowest profit margin points in history. But don’t feel sorry for them just yet, when the CEO of these banks and lenders actually need a mortgage, then it may be time to get out the crying towel!
These short bursts in the bond yield don’t necessarily mean rates are going up for the long term, as proven over the past couple of years but it does mean that if you are in the market for your first dream home or need to refinance in the next 120 days, now is the time to get your rate holds in place to at least begin the process.
Jean-Guy Turcotte is an Accredited Mortgage Professional at Dominion Lending Centres-Regional Mortgage Group and can be contacted for appointments at 403-343-1125, texted to 403-391-2552 or emailed to jturcotte@regionalmortgage.ca.
