How the bond market meltdown could push fixed mortgage rates higher

Rate hikes would occur as sales have dropped in Calgary and Edmonton. Prices have peaked in every market in the country with the exception of Vancouver and Toronto.

Financial Post

Garry Marr | May 14, 2015 6:42 PM ET

An increase in mortgage rates is likely just around the corner, a situation that might push some consumers to lock down their rates.

Given that five-year Government of Canada bond yields have climbed about 40 basis points in the last month, and mortgage rates track bonds, it makes sense to try to get a rate guarantee if you are shopping for a house, Rob McLister of ratespy.com says.

“There is an inclination to recapture some of the spread [between bond yields and mortgage rates],” says McLister, who expects up to a 15-basis point increase on the five-year.

Consumers might consider getting pre-approved for a mortgage before they buy a home – an option that offers a guaranteed rate for as much as 180 days.

“I got an email from one lender suggesting we may see something in the coming days,” said Vince Gaetano, a principle at monstermortgage.ca. “I think it would be very prudent [to get pre-approved]. The only reason people don’t is they are just lazy or don’t know when their mortgage is up for renewal.”

A pre-approval usually involves some sort of credit check, which can affect your credit score, but the impact is likely negligible for anyone with good credit.

A rate guarantee nets you a higher rate most of the time and it rises based on how long you want a financial institution to guarantee the rate. Gaetano says 2.64 per cent can be guaranteed for 120 days on a five-year fixed rate mortgage, which compares with today’s going rate of 2.59 per cent for the same term.

Rate hikes would occur as sales have dropped in Calgary and Edmonton. Prices have peaked in every market in the country with the exception of Vancouver and Toronto. And industry watchers say any upward movement will probably not be enough to slow those markets or lift Alberta sales.

Doug Porter, chief economist with Bank of Montreal, doesn’t think a small change will have much of an impact. “Every basis point matters but can it single-handedly cool markets? It will take something much more serious than that,” he says. “There is very much ‘the little boy who cried wolf’ story going on here.”

Porter expects yields to rise over the next year, and says over the long-term if there is sustained pressure on rates that will change some psychologically in the marketplace. However, a 15-basis-point increase only means about an extra $8 per month in mortgage payments and $700 in interest per $100,000 of debt based on a five-year term and 25-year amortization.

Phil Soper, chief executive of Royal Lepage of Brookfield Real Estate Services Inc., says there are early signs of a seasonal slowing in home sale volumes, even in Toronto and Vancouver.

“The battle for mortgage market share typically eases when that happens. Bond yields have been rising without a clear improvement in the economy, so the upward pressure on mortgage rates would normally be minimal. However, the timing may be right for our trend-setting banks to ease retail rates upwards as they look to manage profit margins,” said Soper.

McLister said there is no risk to getting a pre-approval from a lender because the consumer can always go back to the bank and demand a lower rate or switch to another financial institution, if rates drop by the time of purchase. Only 15 per cent of pre-approvals actually close but he says banks agree to the process to generate customers.

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