Changes in Fixed Mortgage Rates Canada – Driven By Bond Prices and Bond Yields
A lot of people think that the main factor driving the changes in fixed mortgage rates Canada lenders have to make is the Bank of Canada itself. Many consumers believe that the key decision relating to interest rates that this major financial institution makes directly influences all mortgages. However, this is not really the case. Fixed mortgage rates in Canada are impacted by different factors; two of the major ones include bond prices and bond yields.
The Government of Canada Bond Yields – The Biggest Influencing Factor
The factor that has the biggest influence in the Canadian mortgage rates is actually the Government of Canada bond yields. The rates of fixed mortgages generally move in conjunction with the bond yields having the same term. For those who are unaware of what fixed mortgage rates are, these enable borrowers to be ‘locked in’ a predetermined mortgage set for a set duration or period of time. This is referred to as the ‘mortgage term’. In Canada, the most popular term is for 5 years.
Bond prices share a negative relationship when it comes to bond yields. For those who are unfamiliar with the term bond yields, these are the returns that investors out there will receive by holding onto a bond until its maturity period. This relationship directly affects one another in an opposite manner, which is why their relationship is considered to be negative.
In other words, if the prices of bonds increase, bond yields will decrease. When the prices of bonds go down, there will be an increase in bond yields. Bonds are generally considered to be a lot safer than stock investments. This is especially true for Government bonds. This is why bond prices often go down when the market is experiencing a boom and why it goes up when the market is on the low.
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