How Bond Yields Affect Fixed Mortgage Rates in Canada

When shopping for a mortgage, you might hear the term "bond yield" thrown around. But what exactly is a bond yield, and why should you, as a future homeowner, care about it? Let’s dive into what bond yields are, why they matter for fixed mortgage rates, and how this connection can impact your mortgage payments.

What Are Bond Yields?

To start, bonds are like IOUs issued by governments and corporations to borrow money. For example, the Government of Canada often issues bonds to raise money. These bonds come with a set interest rate and maturity date. When people buy bonds, they’re essentially lending money to the government, expecting it to pay back the principal with interest.

The bond yield, on the other hand, is the return an investor can expect from the bond. It’s calculated based on the bond’s interest payments relative to its price. When bond prices go up, yields go down, and vice versa. This relationship becomes key to understanding mortgage rates.

The Bond Yield and Mortgage Rate Connection

Fixed mortgage rates, the kind many homeowners lock into, are closely tied to bond yields—especially government bond yields. Here’s why:

1. Banks and Lenders Rely on Bonds: Banks fund fixed-rate mortgages partly by investing in bonds, as bonds are considered a stable, low-risk investment. So, when bond yields rise or fall, it impacts banks' costs for funding these mortgages, directly influencing the rates they offer to borrowers.

2. Rates Move in Tandem: If bond yields go up, banks' borrowing costs increase, which usually pushes mortgage rates up as well. Conversely, when bond yields drop, fixed mortgage rates often follow suit.

3. Why Do Bond Yields Change? Bond yields are influenced by a variety of factors, like inflation expectations, central bank policy, and general economic conditions. For instance, if the Bank of Canada raises interest rates to curb inflation, bond yields tend to rise, and fixed mortgage rates usually increase too.

Why This Matters for Your Mortgage

If you're looking for a mortgage or planning a refinance, understanding the bond yield connection can give you insights into potential rate movements. Here’s how this knowledge can benefit you:

• Predict Rate Movements: Watching bond yield trends can give you a sense of where fixed mortgage rates might be headed. If yields are rising, it might be smart to lock in a fixed rate sooner. But if yields are on a downward trend, waiting could save you money.

• Making the Right Choice for Your Budget: Fixed-rate mortgages are ideal if you prefer stable payments, especially in a rising-rate environment. If bond yields are predicted to keep climbing, locking in a fixed rate can protect you from potential increases in the future.

• Influencing Refinance Timing: If bond yields drop, fixed mortgage rates might too, opening opportunities to refinance at a lower rate.

In Summary: Bond Yields and Fixed Mortgage Rates Are Closely Linked

Bond yields and fixed mortgage rates are tightly connected in Canada. A basic rule of thumb is this: when bond yields go up, fixed mortgage rates generally go up, and when bond yields go down, fixed mortgage rates often follow.

Keeping an eye on bond yield trends can provide valuable insights into mortgage rates, helping you make more informed decisions about when to buy or refinance.

At Swivel Mortgage Group, we stay on top of these market trends to ensure you get the best advice and mortgage options tailored to your needs.

Ready to find out more? 

Contact us today at Swivel Mortgage Group, where our mortgage experts can help you navigate the rate landscape and choose the best options for your financial future!