The Mortgage Rate Rise: What Is the Impact?
In August to September of 2013, Canadian banks started to increase their five year fixed mortgage rate. The popular five year closed fixed rate was increased by all of the major banks.
Rates are still ridiculously low by historic standards, but quite a bit higher than rates were even last year, when under 3.00% was possible for a five year fixed mortgage. Lower rates are possible with other lenders on a case-by-case basis.
Why have rates increased?
The five year closed fixed mortgage rate is a closely watched metric, and is controlled to a large degree by the bond markets. The rate is priced relative to the yield on a five year Canadian bond. That yield has been increasing as of late, which has caused the banks to adjust their five year mortgage rate upwards.
The primary reason for the increase in bond yields is because the American economy is improving and growing again. This causes many to feel that our GDP may increase, stoking inflation fears. Increased inflation expectations cause bond buyers to demand higher yields on bond investments. Other factors include our weakening Canadian dollar and a cyclical shift from bonds into stocks globally.
What is the likely impact of a rate increase?
If recent history is any guide, the increase in rates will be short lived - in the sense that the rates have been adjusted up and are likely to stay at their new level throughout the winter. The uptick in rates has caused a boost in the Toronto real estate market, with condos sales and prices showing improvement along with the already strong low-rise home market. This is inevitable, as home buyers who were pre-approved at the lower rates rush to find homes and close deals with home sellers before their pre-approval expires or is adjusted upwards.
Once this temporary demand boost is satiated, it's likely that the market will slow over the winter months. If the global economy does not provide any large surprise, it is likely that rates will come down in the spring - or at least the discounted rates offered by banks will fall. Banks will want to boost lending and spur the market during the spring months, so incentives are more than likely during this period.