Canadian interest rate speculators are at it again with news this year that the American Federal Reserve is gearing up to raise interest rates. What’s of interest to us north or the border is that U.S. interest rates are closely tied to certain Canadian mortgage products and can impact mortgage rates here at home.
As you are likely aware, in the Bank of Canada’s most recent rate announcement, the decision was made to leave Canada’s key lending rate at .5%, where it has remained for some time now. While Canada’s key lending rate largely dictates how lenders price mortgages, there are other factors which are influential as well, which has led to speculation that Canadian mortgage rates are set to rise.
So how are your lending rates impacted by what happens south of the border? A recent article in CTV News explains it quite well.
The most common mortgage product offered in Canada is a 5 year, fixed-rate mortgage.
Banks sell bonds to raise funds to lend in mortgages. In Canada, fixed-rate mortgages are tied to the long-term Canadian bond prices. The price of Canadian bond prices are in-turn tied to U.S. bond prices. See how the two are connected?
In instances where the U.S. Federal Reserve raises rates, the result is that bond prices often fall. In such circumstance, banks are likely to respond by tightening their lending processes and increase mortgage rates. This means that Canadian banks’ mortgage rates on fixed-rate mortgages would increase – even if the Bank of Canada didn’t raise the key lending rate.
Increases in 5-year fixed mortgage rates mean different things for different lenders, not to mentioned homeowners. One thing is for certain: this creates an even greater opportunity for B lenders and even privates to compete with the big banks.
Knowing this, it will be interesting to see if the U.S. Federal Reserve raises rates as planned and what impact that will have on 5-year fixed mortgage rates, and if the Bank of Canada will also follow-suit and raise interest rates.
Interest rates have been so low for so long in Canada that it has driven up property values, making it that much more expensive for potential homebuyers to enter the market. The low interest rate cannot be denied as a major contributing factor that has fueled Canada’s real estate industry. When interest rates are low, people are more motivated to buy. If interest rates were to increase, that may result in the cost of housing becoming that much more expensive for Canadian families.
We are interested in what you think. Do you think interest rates going up in the U.S. will lead to increased mortgage rates on 5-year fixed mortgages in Canada?
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