Why Fixed Mortgage Rates Are Climbing While the Bank of Canada Stands Still
The Bank of Canada can hold its rate on a Wednesday morning, and by the following week the five-year fixed quote on your pre-approval can still be higher than it was. Plenty of Edmonton buyers have watched that happen this fall and assumed someone was padding the numbers.
Most of what you pay on a fixed mortgage in Canada is set by bond investors making a bet about the next five years. The Bank of Canada sets the price of overnight money between banks. Those two prices often travel together, and sometimes they split apart. If you're deciding when to buy, when to renew or whether to go fixed or variable, you need to know which one is steering your rate.
Fixed rates follow the five-year bond
Lenders price a five-year fixed mortgage off the yield on five-year Government of Canada bonds, then add their own margin to cover costs and profit. When that yield rises, fixed rates follow, usually within days.
Bond yields climb when investors want more compensation for lending money for five years. Fear of future inflation is the big driver. So is the U.S. bond market: when American Treasury yields rise because their economy stays strong, Canadian yields tend to get pulled up with them. Alberta adds its own wrinkle, since oil prices feed into local inflation and into how investors read the Canadian economy.
There's also a quieter shift. The Bank of Canada now estimates the neutral rate, the level that neither speeds up nor slows down the economy, at somewhere between 2.25% and 3.25%. That estimate has moved up in recent years. Investors read it as a signal that rates are unlikely to return to the very low levels many homeowners remember, and they price bonds accordingly.
Variable rates take their cue from the Bank's overnight rate. When the Bank holds, a variable rate usually stays put, even while fixed rates rise. Each product answers to a different market.
The bond market moves first
The Bank of Canada announces decisions on a fixed schedule. Bond investors trade every minute. By the time the Bank speaks, the bond market has usually priced in what it expects, plus whatever it thinks the Bank is missing.
Waiting for the next announcement before locking a fixed rate means acting on old news. A hold tells you very little about what your fixed quote will look like next month. The bond yield tells you far more, and it's published daily.
Sometimes lenders soften the blow by trimming their margins to win business, so mortgage rates don't always rise as fast as yields. You can't count on that, though.
Each increase shrinks what you can borrow
A higher rate raises your payment, and it also raises the bar you have to clear to qualify. Under federal rules, insured and uninsured borrowers alike must qualify at the higher of their contract rate plus 2 percentage points or 5.25%.
As an illustration, if a quote moves from 4.25% to 4.5%, the qualifying rate moves from 6.25% to 6.5%. That quarter point lowers the maximum mortgage for everyone, and it bites hardest for self-employed borrowers and investors whose debt ratios already sit close to the limit.
A pre-approval with a rate hold works as protection here. It locks today's bond pricing for a set window while you shop, so a bad week in the bond market doesn't quietly take a chunk out of your budget.
Rising rates also cool competition. In Edmonton, that can give a move-up buyer more room to negotiate on price, which can matter as much as a quarter point.
When you're weighing a mortgage decision, ask which rate actually governs it. For a fixed mortgage, look at the five-year bond yield. For a variable mortgage, look at the Bank of Canada. Then judge the timing against that number.
The Bank of Canada can hold its rate on a Wednesday morning, and by the following week the five-year fixed quote on your pre-approval can still be higher than it was. Plenty of Edmonton buyers have watched that happen this fall and assumed someone was padding the numbers.
Most of what you pay on a fixed mortgage in Canada is set by bond investors making a bet about the next five years. The Bank of Canada sets the price of overnight money between banks. Those two prices often travel together, and sometimes they split apart. If you're deciding when to buy, when to renew or whether to go fixed or variable, you need to know which one is steering your rate.
Fixed rates follow the five-year bond
Lenders price a five-year fixed mortgage off the yield on five-year Government of Canada bonds, then add their own margin to cover costs and profit. When that yield rises, fixed rates follow, usually within days.
Bond yields climb when investors want more compensation for lending money for five years. Fear of future inflation is the big driver. So is the U.S. bond market: when American Treasury yields rise because their economy stays strong, Canadian yields tend to get pulled up with them. Alberta adds its own wrinkle, since oil prices feed into local inflation and into how investors read the Canadian economy.
There's also a quieter shift. The Bank of Canada now estimates the neutral rate, the level that neither speeds up nor slows down the economy, at somewhere between 2.25% and 3.25%. That estimate has moved up in recent years. Investors read it as a signal that rates are unlikely to return to the very low levels many homeowners remember, and they price bonds accordingly.
Variable rates take their cue from the Bank's overnight rate. When the Bank holds, a variable rate usually stays put, even while fixed rates rise. Each product answers to a different market.
The bond market moves first
The Bank of Canada announces decisions on a fixed schedule. Bond investors trade every minute. By the time the Bank speaks, the bond market has usually priced in what it expects, plus whatever it thinks the Bank is missing.
Waiting for the next announcement before locking a fixed rate means acting on old news. A hold tells you very little about what your fixed quote will look like next month. The bond yield tells you far more, and it's published daily.
Sometimes lenders soften the blow by trimming their margins to win business, so mortgage rates don't always rise as fast as yields. You can't count on that, though.
Each increase shrinks what you can borrow
A higher rate raises your payment, and it also raises the bar you have to clear to qualify. Under federal rules, insured and uninsured borrowers alike must qualify at the higher of their contract rate plus 2 percentage points or 5.25%.
As an illustration, if a quote moves from 4.25% to 4.5%, the qualifying rate moves from 6.25% to 6.5%. That quarter point lowers the maximum mortgage for everyone, and it bites hardest for self-employed borrowers and investors whose debt ratios already sit close to the limit.
A pre-approval with a rate hold works as protection here. It locks today's bond pricing for a set window while you shop, so a bad week in the bond market doesn't quietly take a chunk out of your budget.
Rising rates also cool competition. In Edmonton, that can give a move-up buyer more room to negotiate on price, which can matter as much as a quarter point.
When you're weighing a mortgage decision, ask which rate actually governs it. For a fixed mortgage, look at the five-year bond yield. For a variable mortgage, look at the Bank of Canada. Then judge the timing against that number.
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