Canadian mortgages are getting a lot more expensive as bond yields surge higher. The benchmark Government of Canada (GoC) bonds are climbing, influencing fixed-term mortgage costs. Canada hasn’t seen this kind of pressure on bond yields since the 90s, at the peak of the last tightening cycle. This cycle, however, is just getting started. Expect mortgage rates to climb like they haven’t in a whole generation.
Canadian Bond Yields Haven’t Climbed This Fast Since The 90s
Canadian benchmark bond yields climbed at one of the fastest rates ever, especially the 5-year term. The yield reached 2.47% on March 29, 2022, up 22.8 basis points (bps) from the week before. Over the past month, yields have climbed a massive 80.2 bps. This is the highest rate yield since May 2011, a level many thought would never be breached again.
The past year has seen yields go from close to record lows, to showing some of the fastest growth ever. The GoC 5-year has climbed 116 bps year to date and is up to 150 bps this past year. A whole generation of Canadians have never seen anything like this.
“That is the steepest one-year move in this key bond since the late 1990s and was last seriously topped in the great tightening cycle of 1994/95 (when yields popped by more than 400 bps in a year),” says BMO Chief Economist Douglas Porter. “That’s the largest five-year rise in five-year rates in 40 years of records.”
Canadian Mortgage Rates Are Climbing Fast
Higher yields will drive mortgage costs higher, at a rate not seen in decades. “In other words, those who took out a mortgage during the hot housing market of early 2017 are facing a big increase in rates,” says Porter.
Mortgage industry veteran Rob McLister mentioned this can mean paying more. He found over the past 5-years, the Big Six have only advertised higher 5-year fixed rates for 3-months. That was from October 2018 to December 2018, a very small window. There is a strong possibility borrowers renewing a 5-year will be paying higher rates.
Though it’s important to remember, even at this rate mortgages are still dirt cheap. Interest costs are still minimal.
“…the only other time the five-year change was this large was in early 1990. This will indeed be a big test for the housing market,” says Porter.