Bond Yields and You: Understanding How They Affect Your Mortgage Rate

Staying on top of market trends is a big part of securing the best mortgage rate possible. Did you know you could have a sense of where mortgage rates are headed just by keeping an eye on something called a bond yield? Let's break down what bond yields are and how they can impact your mortgage options.

Bonds 101

Think of a bond like a very reliable IOU. You lend money to a government or reliable corporation, and they promise to pay you back the amount you loaned (the principal) on a specific date, plus regular interest payments along the way.

Bond yields are the return you get on your investment. Yields can go up and down based on things like interest rates, general economic conditions, and how reliable the borrower seems.

Why do bond yields matter to your mortgage?

Bond yields and mortgage rates tend to move together. When bond yields rise, mortgage rates usually go up too. When bond yields fall, mortgage rates tend to follow. This is especially true for fixed-rate mortgages.

Lenders pay very close attention to something called the 5-year Government of Canada bond yield. Why 5 years? Because it's the most common term for Canadian fixed-rate mortgages. Lenders use it as a guide for how much it will cost them to borrow money for the length of your mortgage.

The Typical Spread: Decoding the Numbers

Over time, lenders have usually aimed to price fixed mortgage rates about 150 basis points (1.5%) higher than the 5-year bond yield. So, if the bond yield is sitting at around 3.5%, you can expect to see fixed mortgage rates somewhere around 5%.

How to use this knowledge

• Check bond yields often: You can find up-to-date bond yield information on financial websites or the Bank of Canada's website.
  • Canada: https://www.marketwatch.com/investing/bond/tmbmkca-05y?countrycode=bx
  • US: https://www.cnbc.com/quotes/US10Y

• Look for trends: Are yields generally going up, down, or staying steady? This tells you if you can expect mortgage rates to do the same.
• Consider the big picture: What's going on in the economy that could be making bond yields move? This will help you make more informed decisions about your mortgage.

A word on other terms and global markets

While most Canadian mortgages focus on the 5-year bond yield, other terms (like 2-year, 3-year, or 10-year yields) can matter too. These are less common terms for mortgages here in Canada, though.

Big changes in the US bond market can also spill over and affect Canadian bonds. Staying up-to-date on wider economic news is always a good idea.

Your Mortgage Advantage

As your mortgage professional, I closely track bond yields and what they mean for your options. This knowledge helps me offer the strategic guidance you need to make the right choice – whether that means locking in a great rate today or waiting to see if an even better opportunity comes along!

Questions? Ready to explore your mortgage options? Let's get in touch!