Welcome to the Flow Real Estate and Money Show, your go-to resource for understanding real estate, mortgages, and finance in Canada. Our mission is to equip you with the knowledge and tools to make informed decisions about your investments and real estate choices. I'm your host, Alex McFadyen, and today we're diving into the intricate world of mortgage rates with our returning guest, Bruno VCO.
Yesterday, we witnessed an unexpected rise in the 5-year Government of Canada bond yield. This occurred even though the Bank of Canada recently cut rates by a quarter percent. The cause of this surge wasn't domestic but rather tied to economic developments in the United States.
"The five-year government bond yield in Canada is closely tied to the U.S. 10-year Treasury yield. When U.S. yields go up, ours tend to follow."
This connection illustrates how deeply intertwined our financial systems are, particularly in the realm of fixed-rate mortgages.
Since our last discussion, there have been significant improvements in the mortgage market, largely due to the Bank of Canada's recent rate cut. However, the effects are complex and multifaceted.
1. The fixed rates are primarily influenced by the Canadian 5-year Government Bond yield.
2. The bond yield is affected by the U.S. 10-year Treasury yield.
3. Despite the Bank of Canada lowering rates, fixed rates are influenced by broader economic factors, especially those in the U.S.
Bruno explained the impact of the recent bond yield increase:
1. U.S. Economic Influence: "The U.S. debate last Thursday led to a surge in the U.S. 10-year Treasury yield, affecting our 5-year bond yield."
2. Market Perception: "Investors saw potential inflationary trends due to the debate's outcomes, causing a rise in bond yields."
There's a significant gap between fixed and variable rates right now, a situation that hasn't been common in recent history. Understanding this gap is crucial for making informed mortgage decisions.
1. Prime Rate: Currently at 6.95%.
2. Fixed Rate: Around 4.89% for a high-ratio 5-year fixed mortgage.
3. The spread between these rates is unusually wide, suggesting room for further Bank of Canada rate cuts.
"The spread is so much higher than usual, indicating that there’s potential for prime rates to come down more before we see a significant drop in fixed rates."
Many Canadians believe that all interest rates are directly tied to the Bank of Canada's decisions. However, the relationship is more complex.
1. Lack of Time: "People have busy lives and don't delve into the nuances of mortgage rates."
2. Misconceptions: "There's a general belief that a rate cut by the Bank of Canada should immediately lower all mortgage rates."
It's essential to consult with a mortgage broker to navigate these complexities. A broker can help you understand the implications of fixed vs. variable rates, the penalties for breaking a mortgage, and how different lenders calculate these penalties.
"Your mortgage broker should be able to explain the differences and help you make the best decision based on your circumstances."
The U.S. economy's size and influence mean that its financial trends significantly impact Canada. This includes bond yields and, consequently, our mortgage rates.
1. Economic Size: "The U.S. economy is ten times larger than Canada’s, making its financial movements impactful globally."
2. Trade Ties: "Canada’s economic health is closely linked to the U.S. due to substantial trade relations."
As we approach the next Bank of Canada announcement, there's speculation about another rate cut.
1. Potential Rate Cut: "There's about a 40-45% likelihood of another quarter-percent drop."
2. Economic Struggles: "With rising unemployment rates and other economic challenges, a rate cut could provide necessary relief."
The mortgage landscape is complex, influenced by domestic policies and international economic trends. Staying informed and consulting with mortgage professionals can help you navigate these waters effectively.
Thank you, Bruno, for sharing your insights and expertise. For our listeners, if you found this episode helpful, share it with someone who could benefit from this knowledge. Stay tuned for more episodes of the Flow Real Estate and Money Show.
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