How Lower Bond Yields Could Affect Canadian Mortgages

Explore the potential impact of declining bond yields on Canadian mortgages, potentially leading to cost savings for borrowers.

The recent cooling in the bond market could lead to potential savings for Canadians renewing or obtaining fixed-rate mortgages. Explore how lower bond yields may soon translate to cheaper mortgage rates, offering potential savings for borrowers.

The Bank of Canada's recent announcement of no interest rate relief has left many Canadians searching for ways to save on their mortgage. While the central bank sets the benchmark interest rate, the bond market can indirectly influence the rates borrowers pay. The recent cooling in the bond market could mean potential savings for Canadians renewing or taking out a new fixed-rate mortgage.

Variable-rate mortgages are directly impacted by the Bank of Canada's target for the overnight rate, while fixed-rate products typically use the bond market as their benchmark. Bond yields have close links with inflation and the Bank of Canada’s policy rate, and will typically fall when price pressures and the cost of borrowing drop. Banks and other lenders use bond yields as a basis for what they should be offering on their fixed-rate mortgage products.

The recent drop in the five-year Government of Canada bond yield could prompt some Canadians to reconsider variable-rate mortgages. Borrowers with variable-rate debt may see their payments drop over the coming months if predictions for lower rates come to pass. However, the uncertainty of the Bank of Canada’s rate path and the volatility in the bond market show how quickly narratives can change.

While lenders are usually quick to adjust their fixed rates on offer when bond yields are rising, they’re typically slower to lower rates on their mortgage products when there’s a dip in the bond market. But if trends continue, eventually the savings will be passed along and rates will drop.

In conclusion, paying attention to the bond market could provide some relief for Canadians seeking to save on their mortgage. While the Bank of Canada's decision on interest rates is a significant factor, the bond market can indirectly influence the rates borrowers pay, particularly for fixed-rate mortgages.