The Bank of Canada hasn't raised its rate. So why are fixed mortgage rates going up?
Because fixed rates don't take their cue from the Bank of Canada. They follow the bond market, and the bond market has already made up its mind about what comes next.
WHY IT'S HAPPENING
Fixed mortgage rates are priced off Government of Canada bond yields, mainly the 5-year. In mid-September, that yield rose roughly 25 basis points in a single week, and the major banks raised their fixed rates shortly after. Some borrowers saw bigger jumps as lenders pulled back discretionary discounts. The main driver is energy. Shipping disruptions through the Strait of Hormuz have pushed oil and diesel prices higher around the world. Diesel is an input into nearly everything, including trucking, farming and food distribution, so higher fuel costs tend to show up in grocery bills and consumer prices a few months later. Markets are pricing in that inflation risk now. Two other forces are adding pressure. The U.S. Federal Reserve raised its policy rate on September 16, its first increase in more than three years, and signalled more may follow. Canada tends not to drift too far from the Fed without the dollar paying for it. And governments on both sides of the border are borrowing heavily, which adds supply to bond markets and nudges yields higher. The result: markets now see close to even odds that the Bank of Canada raises its rate at its October 28 announcement. Most economists still expect a hold through the end of the year. But the stability borrowers have enjoyed for the past several months is no longer a safe assumption.
WHAT IT MEANS FOR YOU
The honest answer depends on where you sit. If you already have a fixed rate: nothing changes for you until your term ends. Your payment is locked. The time to think about this is in the months before your renewal, not today. If you have a variable rate: your rate has not moved, and many lenders are still keeping variable pricing sharp to win business in a slower market. That can change quickly if the Bank of Canada moves. It may be worth asking your lender what they would offer to convert to a fixed rate, so you know your options before you need them. If you're buying: variable rates are currently running close to a full point below comparable fixed rates at many lenders. That gap can mean a higher approval amount. But qualifying for a payment and comfortably carrying it are two different things. Before relying on a variable rate, ask yourself whether you could absorb a quarter to half a point increase over the next 12 months without strain. If your renewal is coming up: don't treat your lender's renewal offer as the only option. In a rising-rate environment, the gap between the first offer and the best available option can widen.
WHAT TO DO NEXT
. Compare the gap. If variable is more than about half a point below fixed and your budget can absorb an increase, variable may be worth considering. If the gap is under half a point, fixed usually earns its place. 2. Stress-test your own budget, not just the lender's. Recalculate your payment at a half-point higher rate and decide whether you'd be comfortable. 3. Don't dismiss a fixed rate in the 3s. Over the long run, that range is close to normal for Canada. 4. Don't freeze. Rate pressures tend to shift every three to six months. Choose a mortgage structure you can live with in either direction, rather than trying to predict the next move. Not sure how this affects your situation? Book a call with me.
