Will rising bonds CRUSH the Canadian mortgage market? Surrey REALTOR shares how mortgages will react

Many people don't realize a strong correlation between a fixed mortgage rate and the bank of Canada bond yields. Both are rates that can change daily, but each carries different risks for investors. At a relatively opposite end of each spectrum, fixed mortgages are considered riskier assets for the banks, while government bonds are thought of as safer or even risk-free. So why is this government bonds are 100% guaranteed to be repaid. Because, well, they belong to the government, but the mortgages, well, they're not.

Mortgages carry a risk of default or early repayment, which could potentially disturb the expected return on the investment. Now, mortgage rates therefore, are priced higher by banks. To compensate for that added risk. Okay, let's do this. Many factors can affect fixed mortgage rates, but the single biggest factor is the Government of Canada bond yields. Banks actually use the five year bond yield market to determine their fixed mortgage rates, using the forecasted earnings from bond investments to cover costs and possible losses incurred through their mortgage market.

So the question you may be asking is how much higher are mortgage rates priced over bond rates? As the five year bond yield rises, lenders get squeezed by the rise in funding costs. At some point, they can no longer absorb the increase and will pass it on to you, the borrower, by raising the fixed mortgage rates. As a reminder, variable rates aren't as affected as they are tied to the prime rate as set by the bank of Canada. In a normal market, the average spread or markup of fixed mortgage rates above secured government bonds is roughly 1% to 2%.

That Mark up or spread relationship will widen and contract in response to a range of market conditions, such as the risk of rising inflation (which we're commonly seeing), investor appetites, product supply and competition from other investment opportunities like things like, I don't know, corporate bonds or equity markets. It's not automatic that banks will raise fixed mortgage rates as soon as bond yields increase, but with economic conditions trying to sketch out a little bit of a recovery and housing markets trying to cool off if bond yields increase, fixed rates are also likely to follow. Looking on a great website called They state that Canada's ten year government bond yield rose to 2.32%, again approaching more than a three year high of 2.54% hit in March as expectations of more aggressive monetary policy tightening are rising. In the US, as an example, a strong jobs report and rising inflation expectations strengthen the case for a 50 basis point increase by the Feds.

Meanwhile, the bank of Canada locally is expected to hike interest rates by half a point during their next April meeting, and they kind of expect it's going to go up in total about 200 to 220 basis points, or roughly 2% in total. The last several months have seen a high degree of volatility in global bond markets as interest rates were whipsawed by the combating forces of Omicron, COVID escalating inflation and of course, most recently, the really unfortunate invasion of Ukraine by Russia. While the pandemic and global events are adding uncertainty to global financial markets, the driving force behind longer term rise in interest rates remains the elevated level of inflation across major world economies and global central banks reaction to that inflation. Consumer price inflation reached a 30 year high in January at 5.1% year over year, and Canadians expectations for the rate of inflation has more than doubled. The latter is particularly concerning for the bank of Canada, as expectations becoming unanchored from the 2% inflation target risks a feedback loop from rising expectations to wage demands to current inflation that will be challenging to break.

As a result, the bank of Canada has adopted a more aggressive schedule of rate increases than what was expected just six months ago. Canadian fixed mortgage rates began increasing toward the end of 2021 and have now risen back to their pre-pandemic levels of 3%, while variable rates, which again move in lockstep with the bank of Canada's overnight rate, are now also on the rise. The British Columbia Real Estate Association has the view that the bank will continue to increase its overnight rate until it reaches the pre-pandemic level of 1.75%, which implies a variable rate of 3.25% by the end of 2023. So now you know how bond rates impact mortgages and what to watch out for if you are someone considering either buying or selling. Of course, the famous question I am getting all the time lately is whether or not to wait.

Here is the dirty on that question. Either way, borrowing is likely about to get much more expensive. Regardless, if you continue to live where you currently are or sell to buy a new home, you could consider locking into a fixed mortgage rate today. At today's rates, which are seemingly likely to be generously higher in the next twelve to 18 months from now, the only people not to be affected by rising rates, of course, will be those already in fixed term mortgages. While anyone on a variable rate or anyone that may need to renew their current mortgage in the near future may want to consider looking into what is likely a more expensive mortgage in the future if not done today.

If you have questions about any of the information in this video and how it relates to your particular situation, whether you are looking to buy or sell, be sure to check out in the description a link directly to our calendar where you can book a time to chat with me and let me know about your situation. I can fill you in on the best advice for wherever you may be. And of course, if you're selling a home, you're also going to want to grab a copy of our free PDF "Four ways to increase your home's value by up to 5% in only a weekend". We dove deep into the research for this one to make sure it was incredibly valuable and this is actually the document we give to all of our home sellers to help them absolutely maximize their value. So be sure to pick it up and if you're watching and you're planning on buying a home, we've got something for you to four Secrets to Finding Off Market Properties and how to Stop Competing against Other would be home Buyers For properties that are on the MLS, there is lots of great homes out there and by digging up an off market property you have the opportunity to not only find an awesome place but also to not be in competition with other people on it.

Thanks for reading, once again I’m Darin from the Germyn Group and you only have once chance to either buy or sell your home. Let us help you get it right. Bye

Watch the full video here:

DOWNLOAD our free PDF: 4 Secrets to find Off-Market Properties

DOWNLOAD our free PDF: The Crazy Market Playbook

SCHEDULE a time now to talk about purchasing your next home!

SUBSCRIBE to get the latest Germyn Group videos:

Watch our #DrinksWithDarin series:

Connect with us to learn more about how we can help you get it right, the first time!

Visit The Germyn Group WEBSITE:
Like The Germyn Group on FACEBOOK:
Follow The Germyn Group on INSTAGRAM:
Email us at, or call 604-542-2444

The Germyn Group
Darin Germyn PREC* & Adam Howsam
Macdonald Realty LTD | 604-542-2444 |
No comments

Post Your Comment:

The data relating to real estate on this website comes in part from the MLS® Reciprocity program of either the Real Estate Board of Greater Vancouver (REBGV), the Fraser Valley Real Estate Board (FVREB) or the Chilliwack and District Real Estate Board (CADREB). Real estate listings held by participating real estate firms are marked with the MLS® logo and detailed information about the listing includes the name of the listing agent. This representation is based in whole or part on data generated by either the REBGV, the FVREB or the CADREB which assumes no responsibility for its accuracy. The materials contained on this page may not be reproduced without the express written consent of either the REBGV, the FVREB or the CADREB.