Surging bond yields point to rising mortgage rates ahead, industry watchers say
Existing home owners could face sensitivity to rising rates, with about $350 billion worth of mortgages set for repricing in the next year
Ultra-low mortgage rates offered throughout the pandemic may soon be coming to an end after the Bank of Canada last week ended its bond-buying stimulus program and signalled it would hike interest rates sooner than expected in the face of rising inflation.
The move led to a spike in five-year bond yields, a figure closely followed by mortgage lenders, by nine basis points to 1.43 per cent on the day the announcement was made.
For consumers who hold an average of $450,000 in new mortgages, a one per cent increase in mortgage rates would cost an average new home buyer about $230, or 12 per cent more, in extra monthly interest payments, according to a Thursday note from Benjamin Tal, deputy chief economist at CIBC Economics.
Tal added that existing home owners could face sensitivity to rising rates, with about $350 billion worth of mortgages set for repricing in the next year.
Mortgages originating between 2017 and 2019 would not be exposed to the full cycle of potential rate hikes in the coming years.
“That, however, is not to say that higher rates will not bite,” Tal wrote to investors. “If rates stay elevated into 2025, the massive borrowing undertaken during the pandemic will feel the full bite of higher rates.”
Over the past few months, bond yields have been rising on market sentiment that enduring inflation would force the Bank of Canada’s hand when it comes to hiking rates, according to Joey Mack, fixed income analyst at RF Securities Clearing. Following the central bank’s hawkish move last Wednesday, yields jumped even further amid a mass sell-off, particularly in the shorter-term bonds.
“Although the biggest move was in two-year yields (closing up 0.20 per cent on the day), the five-year yield also sold off pretty sharply, ending up 0.09 per cent,” Mack wrote in an e-mailed response to the Financial Post. “This is a pretty large move, on average the five-year yield trades within a 0.02 per cent range on most days.”
Mortgage specialist Rob McLister said that there is still value to be found among term options.
“Looking out at potential term options right now, value … is in the four- or five-year fixed space,” McLister told the Financial Post. “You don’t want to do it any more than for five years because the rates are too high and the penalties are atrocious.”
In a rising rate environment, McLister is concerned for variable-rate borrowers who live paycheque to paycheque, expecting that they could struggle over the next two years. Since the cost of living is rising, he advises borrowers to calculate what their payments would be after a two-percentage point climb or higher. If the rate raise puts too much pressure on their budgets, McLister said borrowers should lock in for as long as they plan to keep their mortgage rates up to five years.
At the same time, borrowers need to be wary of fixed-rate mortgage penalties if they need to break their mortgage before it reaches maturity.
McLister noted that normally, the Bank of Canada would get out in front of expected inflation with its own pre-emptive hikes. This was not the case this year as the bank looked past inflationary red flags such supply chain bottlenecks and record fiscal stimulus spending during the pandemic.
With the central bank setting itself up to hike rates sooner than expected, McLister anticipates that more borrowers will rush to their banks for mortgage guidance.
This year saw the first time in five years that variable-rate mortgages took the lead over fixed rates in popularity, with a National Bank of Canada report in September noting that 51.3 per cent of new residential mortgages were variable compared to the 48.7 per cent fixed rates.
NBC economist Daren King and author of the note attributed this shift in preferences to the widening spread between fixed and variable rates, seeing a 76 basis point spread in favour of variable rates on conventional five-year terms in July.
Source: Financial Post
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