Fixed Rates & Bond Yields: The important 3 W’s – Why? What? When?

Yay! The Bank of Canada announced a 50 basis point cut today! That means fixed rates are coming down too now, right? Sadly, this is wrong.

But, why?

While there is some loose correlation between the two, there is no causation. Fixed rates are based on the bond yield, and surprisingly also, the US 10 year treasury.

While the Bank of Canada dropped their overnight rate by 50 basis points today, the bond yield has come up, as seen below.

And then if we look at the US 10 year treasury, shown below, they look kind of similar, don’t they over the year?

So, what does this mean?

Well, it means that if you have a fixed rate mortgage, or want a fixed rate mortgage, these Bank of Canada announcements are moot for you. You’ll want to pay attenion to economic factors like wars, unemployment, oil, etc. These things impact the fixed rates.

Ok, I guess I get it, but when will fixed rates come down?

Jobless numbers out of the US tomorrow (October 24, 2024) will have an impact on yields and therefore fixed rate mortgages in Canada, but the explanation on today’s US 10year is similar to the other day, with a few Fed Presidents having spoken since Monday:

A fun saying to remember is that banks take the elevator up, meaning that when the bond goes up, the lenders also are very quick to hike their rates – and they take the stairs down, meaning that they are very slow to be reactionary to the bond decreases.

So… my renewal is soon – what do I do?

In a market like this where rates are dropping it really comes down to peace of mind.

Unlike variable rate options that fluctuate with market conditions, a fixed rate mortgage locks in your interest rate for the duration of the term, protecting you from unexpected rate hikes. This stability allows for predictable monthly payments, making budgeting easier and planning for your financial future. Many people in 2024 have been taking 3 year fixed terms thinking that in 2027 the rates will be lower than they are today. 5 year fixed rates lock you in at the current rate for longer, but also provide a longer peace of mind because you don’t have to think about anything to do with a mortgage for the next 56 months.

As someone that has had both a fixed rate and a variable rate with fluctating payment – I’ll be taking a fixed for my next renewal. While the ride up has been fun, I have learned that even if the payments were to not have increased, I don’t like the fact that they can fluctuate. (Even if I had a static payment variable, it would mean that my amortization wouldbe 60 years probably by now and my payments would effectively be interest only!)

Some people don’t want to be locked into a fixed term right now though, so what do they do? Well, a variable rate mortgage might just be their best buddy. Here’s why: with a variable rate, your interest can go down as the market drops, meaning your monthly payments could get cheaper over time (this is dependant on rate drops, and if you have a static payment or a fluctuating payment variable mortgage)

Right now, your interest rate will be slightly higher for a 5 year term with a variable than with a fixed (insured mortgage variable currently prime minus 0.95% = 5%, while a fixed 5 year is 4.39%) but with just 0.75% (75bps) more in rate cuts from the bank of canada, their interest will be lower than that fixed 5 year rate. Imagine saving money each month while your friends are stuck with a fixed rate, paying the same (possibly higher) amount.

Of course, it’s a bit of a gamble since rates can rise again, but if you’re comfortable riding the waves and believe rates will keep falling or stay low for a while, a variable rate can really pay off. It’s all about your comfort level and how long you plan to stay in your home.

Also – a variable rate can be locked at any point in the term as long as you’re locking in a term length that is equal to or longer than your remaining time. So if you take that 5 year variable now, and in 1 year the fixed rates have fallen quite a bit, you can lock into a 4 or 5 year fixed rate and have a lower fixed rate than you would have had you locked in 12 months previous.