Canada’s era of cheap debt and low inflation is now firmly behind us — and it disappeared really fast. The Government of Canada (GoC) 5 Year Bond closed at the highest level in a decade today. Five Year yields are important to real estate, influencing one of the key mortgage rates. As a result, Canadians should expect to pay the highest mortgage interest in a decade — and these rates are just getting started.
Bond Yields Influence Mortgage Rates
Government bond yields influence the interest cost on debt of similar term lengths. When yields rise or fall, the interest cost on debt is just a few steps behind. One of the most important bonds is the 5 Year, directly influencing the 5 year fixed rate mortgage. The mortgage also happens to be one of the most popular mortgage products. Especially when interest rates are rising.
Canadian Bond Yields Surged To A Decade High
The 5 Year Government Bond yield is climbing at an usually rapid rate these days. The yield closed the week out at 2.544% today, up 7.65 basis points (bps) from last week. Over the past month, the yield has climbed 74.25 bps — one of the fastest jumps ever. Canada hasn’t seen it this high since April 2011, over a decade ago.
Government of Canada 5-Year Bond Yield
The percent yield of the Government of Canada’s 5-year bond.
Source: Bank of Canada; Better Dwelling.
We don’t have to go far back to show how strangely fast the climb has been. The yield increased 158.67 bps from last year, meaning the past month was nearly half the increase. To say this is a rapid rate would be to undersell this crisis-like movement in response to inflation.
Canadian 5 Year Fixed Rate Mortgages Are Soaring
Canada has also seen 5 year fixed mortgage rates climb just as fast in response. For example, RBC’s posted rate was near a record low of 2.19% as recently as October. As of today, it’s climbed to 3.94% — a significant increase in such a short period of time. In situations where a stress test is not applied, a buyer would see a 17% drop in maximum buying power. Stress tested buyers are already tested at a higher 5.25% interest rate, so their maximum mortgage is only minimally impacted. Though this rate cycle is the first time where a buyer’s contract rate plus 2 points can exceed the current stress test threshold, meaning the first drop in leverage in years.
Five year fixed term mortgages were the most popular mortgage until recently. When these began climbing a year ago, buyers began looking at variable rate mortgages. Those are based on the overnight rate, which failed to move with market expectations. This left a gap of cheap money that buyers were more than ready to take advantage of. With the overnight rate climbing with 5 year fixed rates, there’s nowhere left to hide. As a result, some economists expect a repricing of assets — a fancy way of saying falling home prices.