If you’ve been keeping an eye on mortgage rates lately, you might have noticed some slight upward pressure on fixed rates. As of November 4, 2024, bond yields have ticked up from 2.727% in late September to 3.014%. While this isn’t a huge increase, it’s enough to nudge fixed mortgage rates upward a little.
Why Are Fixed Rates Rising? A Quick Breakdown
Fixed mortgage rates don’t move with the Bank of Canada’s overnight rate, which tends to affect variable rates. Instead, they’re tied to bond yields. When bond yields go up, banks pay more to borrow money, so they increase fixed mortgage rates to cover these extra costs.
Fixed rates being tied to Government of Canada (GoC) bond yields, don’t directly mirror Bank of Canada’s moves. But bond investors are pricing in future expectations of BoC’s path, and that’s led to a drop in GoC bond yields over the summer. These bond yields are now reflecting expectations of even more BoC cuts, down to about 2.50-2.75% next year.
But here’s a twist: markets don’t usually follow a straight line, and when everyone expects rates to keep dropping, we sometimes see the opposite happen. It’s a reminder of the old investment adage: “When all the experts agree, something else usually happens.”
US Election Jitters: What Could It Mean for Mortgage Rates?
This Tuesday, Americans are heading to the polls to pick their next president, and if things go the way many polls are hinting, it could be a nail-biter. We might not know the winner on election night, especially if it’s close.
Now, here’s the big question for us: if the election results get messy, what does that mean for bond yields? Will all the extra uncertainty drive investors to add a “risk premium” to US Treasuries, nudging yields up? Or will we see a “flight to safety” where investors pile into bonds, pushing yields down?
It’s tricky to say for sure at this point. Both scenarios are possible, and we could see a material impact either way.
Locking In vs. Staying Flexible
If you’re thinking of locking in a fixed rate now, that can be a smart move if you’re concerned about future increases. However, if lower rates appear before your closing or renewal date, working with a mortgage broker who actively monitors rates could help you secure that better rate without locking you into the initial one.
Fixed vs. Variable: Looking Ahead to 2025
Historically, variable rates have tended to be lower than fixed rates over time. Currently, some economists expect variable rates might drop by another 1.5% by 2025, bringing them down to around 3.5%. Meanwhile, the best fixed rates for insured mortgages are sitting at about 3.99% for a 3-year term or 3.94% for a 5-year term. With fixed rates already close to where economists think variable rates could land, we may not see a dramatic downward slide in fixed rates anytime soon.
So, if you’re weighing your options between fixed and variable, think about what fits best with your plans and risk tolerance. Whether you’re locking in now or waiting to see what the next few months bring, having a broker who stays on top of the rate market can make sure you get the best deal possible. Remember, anything can happen, so be sure to keep up to date with the current market trends to get an idea of where rates could possibly be heading.
Key Takeaways:
Bond Yields Are Impacting Fixed Rates: Bond yields have increased slightly from 2.727% in September to 3.014% in early November, which is putting a bit of upward pressure on fixed mortgage rates.
Fixed Rates Don’t Follow the Bank of Canada Overnight Rate: Unlike variable rates, which are influenced by the Bank of Canada’s overnight rate, fixed rates are tied to bond yields. This means Bank of Canada rate cuts may not lower fixed rates.
Flexibility with a Mortgage Broker: Locking in a fixed rate now can secure your rate against potential increases. If lower rates become available before your closing or renewal date, a mortgage broker monitoring the market can help you adjust to a better rate.
Variable vs. Fixed Outlook for 2025: Variable rates could potentially fall another 1.5% by 2025, reaching around 3.5%. With the best fixed rates currently around 3.99% for a 3-year term and 3.94% for a 5-year term, further drops in fixed rates may be limited.
Consider Your Risk Tolerance and Plans: With both fixed and variable rates offering potential advantages, choosing the right option depends on your comfort with risk and your long-term financial goals.
