The past two weeks have seen a flurry of mortgage rate increases at mortgage lenders, including several of the Big 6 banks.
The move follows a more than 70-basis-point surge in the Government of Canada 5-year bond yield, which typically leads fixed mortgage rate pricing. It’s now at a 14-month high of 3.58% as of Monday, up from a recent low of 2.87% earlier this month.
BMO, CIBC and RBC have all increased some of their posted fixed mortgage rates over the past week. Rate hikes have largely targeted shorter terms, with BMO increasing its 1- to 3-year fixed terms by 10-65 bps, while RBC hikes its 1- to 3-year fixed terms by 10 bps.
Shorter-term mortgages of between one and three years have become increasingly popular for homebuyers and those renewing their mortgages. As of January, 36% of new mortgage originations had fixed-rate terms of three years or less while 28% had fixed-rate terms of between three and five years, according to recent data released by the Canada Mortgage and Housing Corporation (CMHC).
The shift in mortgage preferences is being driven by borrower expectations that the Bank of Canada will be forced to start cutting rates by next year due to a potential recession.
Surging funding costs driving rates higher
Over the past week and a half, nationally available 5-year fixed terms at most lenders are up an average of 0.16% for insured mortgages (those with a down payment of less than 20%), while uninsured 5-year rates are up about 0.10%, according to data from MortgageLogic.news.
Ron Butler of Butler Mortgage said he expects fixed rates to be between 40 bps and 60 bps higher once this latest round of hikes is done.
“Concern over the U.S. debt ceiling combined with the recent tiny inflation bump in Canada means that bond yields for all terms have soared,” he told CMT. “And bond yields drive fixed mortgage rates.”
There have been growing concerns that the U.S. could default on its debt obligations next week failing a successful bi-partisan deal being passed by Congress to raise the country’s $31.4 trillion debt ceiling.
And in April, Canada’s consumer price index ticked up to 4.4% from 4.3% in April, raising fears that the Bank of Canada may face challenges bringing inflation back down to its 2% target.
Keeping an eye on spreads
Ryan Sims, a mortgage broker with TMG The Mortgage Group and a former investment banker, said a more concerning development that isn’t being talked about is the surge in overnight spreads, particularly for shorter terms, which he said are “through the roof.”
The 1-year bond yield is now 108 basis points above the 5-year yield, which explains the rising rates for shorter-term fixed mortgages.
“There is starting to be a bit of stress in the overnight funding markets, and it’s picking up steam,” he told CMT. “Banks are starting to price in a lot of risk in both commercial, residential, and even interbank lending, and that leads to a liquidity crunch 11 times out of 10. The bond market is the largest and deepest pool of capital, and some participants are getting worried.”
He said part of this could be related to the U.S. debt ceiling talks, but noted spreads haven’t risen to such levels during previous debt ceiling debates.
“I think come the fall of 2023 we could see some shock to the system that plays havoc on liquidity,” he added. “Based on that, even if we see bond yields and prime rate fall, I don’t prognosticate that all of it will flow through to borrowers, as the banks will keep spreads elevated to account for presumed risk and general credit tightness.”
Sims added that while rising rates on their own don’t cause a recession per se, “however, the speed they go up, and the inversion of the yield curve, says a recession is headed our way.”
