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What dictates changes in interest rates ?

3/3/2021

MORTGAGE RATES (FIXED AND VARIABLE) – how does it work?

 

Why does the 5-year bond yield matter?

Fixed mortgage rates are based indirectly on the government of Canada bond yields. That’s why the most popular mortgage term in Canada (the 5-year fixed) closely follows the 5-year bond yield. While it can deviate for short periods, the spread (difference) between 5-year yields and 5-year fixed rates always come back to their long-term average.

5-year Yield History

All-time high: 18.78% (September 1981)

All-time low: 0.276% (March 2020)

March 3rd, 2021 – 0.84%

Canada 5-year Yield Forecast 2021

The median average forecast for the government of Canada's 5-year yield is 0.80% by year-end 2021. That is 0.41 percentage points—i.e., 41 basis points—higher than it was at the end of 2020 (it closed 2020 at 0.39%).

The median forecast for year-end 2022 is 1.30%.

These forecasts are derived from the individual 5-year yield forecasts of Canada’s Big 6 banks, as of January 20, 2021, and are subject to change.

How Does the 5-year Yield Affect Fixed Mortgage Rates?

Discounted 5-year fixed rates are typically 150+ basis points above the 5-year yield. This “spread,” as it’s called, can vary anywhere from under 100 to over 200 in times of financial stress.

Does the 5-year Yield Affect Variable Rates Too?

Lenders set variable rates as a discount to prime rate. Prime rate generally changes with the Bank of Canada’s overnight rate.

The 5-year yield does not directly impact variable rates but it does reflect market sentiment, which can presage changes in Canada’s overnight rate.

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