Canadian bond yields have tumbled in the past few months and there’s talk that fixed-rate mortgages could follow suit. The key word is could.
Fixed-rate mortgages, which are influenced by government bond yields, theoretically should be going down because bond yields have tumbled significantly in the past few months.
Yields for five-year government bonds saw a sharp drop in November, with a high of 2.46% early in the month, and have not recovered since. That number hit a low of 1.752% on Jan. 3, and as of Monday, it had risen only marginally to 1.86% — a drop of more than half a percentage point since November, and lower than it was at any point in 2018.
Despite the months-long decline in bond yields, the country’s major banks have been slow to adjust their fixed-rate mortgages, likely because the holidays are a slow season for home buying — giving banks little incentive to be competitive by giving up potential profits from higher rates. Banks have also been selling less mortgages since the Office of the Superintendent of Financial Institutions introduced its “stress test” rules at the start of 2018.
“Given that the banks’ [mortgage] volumes are down, and they want to maintain the same level of profitability, they might want to try to make more of every deal and do less deals,” Shawn Stillman, co-founder of Mortgage Outlet, told LowestRates.ca on Tuesday.
When bond yields were high in 2018, however, the banks were much more quick to act.
In October, just a month before yields started falling, bond yields had reached their highest level since 2011, and The Bank of Montreal, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank all quickly lifted their fixed rates for their prime customers by as much as 20 basis points. With the exception of National Bank, the banks also raised their posted fixed rates — i.e., the non-discounted rates that each institution advertises to customers prior to negotiations.
In the U.S., bond yields have also declined since last fall, and have already helped lower mortgage rates. Because Canada’s mortgage market is dominated by the country’s major banks, however, there is less competition and therefore less incentive to lower rates quickly. The U.S., in contrast, is home to a much wider number and variety of lenders.
As staff return to work after the holidays, though, homebuyers could be seeing lower rates soon — especially with alternative lenders, Ron Butler, founder of mortgage brokerage firm Butler Mortgage Inc., told the Globe and Mail on Monday.
But banks likely won’t feel too much pressure to lower their rates until the year edges closer to home buying season.
“Should they lower rates based on the bond yields? Absolutely, based on historical spreads,” said Stillman.
“Will they go down? Probably not.”