Mortgage rate rises have been commonplace during the last two weeks at mortgage lenders, including a number of the Big 6 banks.
The change comes after a more than 70 basis point increase in the yield on the 5-year bond issued by the Government of Canada, which ordinarily sets fixed mortgage rate pricing. As of Monday, it was up from a previous low of 2.87% earlier this month to a 14-month high of 3.58%.
Over the past week, BMO, CIBC, and RBC have all raised part of their listed fixed mortgage rates. Shorter terms are the main focus of rate increases; BMO raises its 1- to 3-year fixed terms by 10-65 bps, while RBC does the same with a 10-bps increase.
Rising funding expenses are pushing up rates
According to information from MortgageLogic.news, insured 5-year fixed rates at the majority of lenders have increased on average by 0.16% over the previous two weeks, while uninsured 5-year rates have increased by roughly 0.10%. Insured mortgages are those with a down payment of less than 20%.
After this most recent round of increases is over, Butler Mortgage’s Ron Butler predicted that fixed rates will be between 40 bps and 60 bps higher. “Bond yields for all terms have soared,” he told CMT. “Concern over the U.S. debt ceiling combined with the recent tiny inflation bump in Canada means that.” And fixed mortgage rates are determined by bond yields.
Paying attention to spreads
Ryan Sims, a mortgage broker with TMG The Mortgage Group and a former investment banker, claimed that the increase in overnight spreads, particularly for shorter periods, which he described as being “through the roof,” is a more alarming development that isn’t being discussed.
Shorter-term fixed mortgage rates are increasing since the yield on 1-year bonds is currently 108 basis points higher than the yield on 5-year bonds.
He told CMT that the overnight finance markets are beginning to experience some stress and that it is intensifying. “Banks are beginning to factor a lot of risk into their commercial, residential, and even interbank lending, which 11 out of 10 times results in a liquidity constraint.
Although rising rates by themselves don’t always trigger a recession, Sims continued, “a recession is headed our way given the speed they are rising and the yield curve inversion.”
