Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Zero coupon yield curve may not be an important chart for our daily schedule but when you are deciding what to do with the future of your mortgage then it comes handy. Yield curve is a reflection of the mind set of bond investors. It shows what investors are thinking in terms of return and it is supposed to be a gradually raising curve (in its ideal shape).

Canadian Zero Coupon Yield curve was weak, inverted and unpredictable since the meltdown in 2008. Now it is showing some real strength. Currently the yields are low due to US political turmoil but we can hope that it is only a temporary factor. The underlying fundamentals of Canadian economy are improving and it will eventually push the financial sector out of the current state of uncertainty.

zero-coupon-bond-yield-BOC-June-2013 canadian-five-year-bond-yield-oct-2013

A stronger economy along with a healthy return from stock market will send the bond prices lower. Yield will return to historical normal (higher from current stage) and fixed mortgage rates will go up.

Once the US economic situation returns to normalcy – the regular bond yield trend will resume.

Fixed Rate Trend:

The current trend is upward. This trend is likely to continue in near term future. Mortgage rates started to go up but it is now taking a momentary break due to some technical glitches. Once the technicalities have been ironed out – mortgage rate will resume its upward growth.

If your mortgage term renewal is coming up or you are buying a home then shop for the fixed rates because they may not last long.

Variable Rate Trend:

Variable rate trend appears to be stable at this moment. Rate discounts are also at the same level where they were few months ago. Economists from Scotiabank are predicting that Bank of Canada will remain at the sideline till 2016.

According to a Scotiabank commentary

Thus, our later-than-consensus view that the BoC will be on hold until 2015Q3 with the fatter tail risk of later rather than sooner could now face support for a policy hold well into 2016.

This is not exactly what others are thinking.

RBC economists think (taking recent US conundrum in consideration) – that until late 2014 there will be no change in the overnight rate by BoC even after economy has regained some of its lost might. The banks economists also think that the Canadian central bank will take its cues from US feds.

Variable rate may be a good option for the borrowers who want greater flexibility in terms of prepayments.

The Bottom Line:

It is not yet clear that if BoC will really stay on the sideline when inflation go up – but it definitely will consider a possibility or hiking the rate.

All predictions are based on some assumptions and if in case they turn out to be wrong for one, then the prediction is very much useless.

In the end it is the decision of a borrower if to proceed with fixed or a variable rate mortgage. The present situation demands that a borrower pays more attention to the fixed rate mortgage.

Although fixed rates are bit higher than the variable rates – it worth the extra dime to give you a long term peace of mind.