Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Canadian five years bond yield - 2014- April

In the broader residential mortgage perspective there are two types of interest rates. One is variable interest rate, another is fixed interest rate.

Variable rates depend on bank prime rate which is supposedly anchored to Bank of Canada overnight lending rate.

The central bank’s target rate is supposed to be volatile in nature. It actually is. The target varies between 0.75% to 1.25%. On an average it has stayed 1% for a long time. Since the last quarter of 2010 it has been stagnant at 1%. The bank did not see any reason (compelling) to raise it. It did not give us any indication that it is going to happen in future if there is no significant change in the underlying conditions.

Fixed rates depend on bond yields. It is a stable type of rate for people who are looking for a stable monthly payment for a longer period. It is also good remedy for borrowers who are on the borderline of debt ratio.

Now, the bond yields are not moving up at all. The factors that influence the yields like –

Financial Market Condition

while it is much better than where it was few years ago but it is way short of a healthy market. Unless the market improves significantly there is less chance of bond yields returning to normal.

Inflation

it is still in the comfort range of the government and regulators. So, no immediate action is forthcoming.

Business Borrowing

Business owners are somewhat optimistic about the future but that is yet to turn into any serious action on their behalf.

Government Debt Issues

Canadian treasury has reduced borrowing but the debts are still in demand. That indirectly indicates that the savers are still looking for safe investments. As long as the investors hold the bonds dear to them the yield will not rise.

The next factor is a direct one – demand for borrowing. With the housing start falling and resale of residential homes dropping – mortgage demand will be at a low level. So, the market is like the lenders are more willing to lend than the number of available borrowers. So, there is a competition in the market – which is not healthy.

With all the factors indicating towards a stable mortgage interest rate future – do you think that they will go up in future?