There is a lot of noise when central banks announce interest rates. They will say that this is normal because these decisions have a direct impact on variable interest rates.
On the other hand, little attention is paid to the rise in Canadian government bond rates, which is influencing the development of fixed-rate mortgages, the most popular choice among homeowners.
Well, they’ve been climbing at an alarming rate for the past few weeks!
At the beginning of June, the interest rate for five-year government bonds was 2.86%. A week ago it hit 3.58%, a high since 2008. We haven’t seen such a rapid rise in thirty years, and we haven’t seen an end to it.
Anyone who swears by the fixed interest rate will take the plunge if they have to extend their loan in the coming months. Five years ago they secured financing at less than 3.0% interest. The best five-year rate offered for an insured mortgage is now around 4.9%; Most borrowers pay more than 5%. Next step: 6%!
The connection between bonds and mortgages
Canadian government bond interest rates fluctuate daily. In an inflationary environment, investors buying government bonds will demand higher interest rates. It is the interaction of supply and demand that determines prices. Financial institutions rely on bonds to set the fixed rate on their mortgages. Why ? To fund their mortgage loans, banks resell part of their loan portfolios in the capital markets, markets where they compete with government debt.
However, government bonds are 100% safe, which is not the case with mortgages. This added risk (plus the margin lenders keep for themselves) is reflected in the interest rate differential between bonds and mortgages. The difference is between 100 and 200 basis points (100 points equals 1%) depending on the circumstances. It was hovering around 120 a week ago, has since widened and could gain further momentum on a worrying financial environment.
In other words, fixed-rate mortgage rates are rising a little faster than bond rates, which are already rising at an unusual rate. This is not good news for those looking to roll over their credit in the coming months.
The impact on the real estate market
- Those looking for a fixed rate mortgage need to qualify with an interest rate of 7%! It beats the ghosts…
- In Canada, a borrower must pass the “stress test”. When assessing the weight of mortgage debt in their customers’ budgets, lenders must add 2% to the interest rate they charge. Result: More and more prospective buyers are disqualified!
- Last week, Desjardins presented its real estate projections, including a 12% price drop in Quebec by the end of 2023. The decline appears to be more pronounced in other regions of the country. The Bank of Canada spoke more dramatically of a correction and the risk of a cascading effect that would weigh on the financial system.
- Look no further for an explanation: it’s the credit crunch that’s going to cool people’s minds. It looks like another tile in the current barrage of negative news, but this tightening is necessary.
- Those who borrowed to the limit of access to property last year won’t see it that way.