Featured #Renewal and Refinancing
Featured #Renewal and Refinancing
What Do Changes in Bond Yields Mean for Your Fixed Rate Mortgage Renewal?
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Mortgage renewals can feel routine, but behind every rate your lender offers is a complex web of market forces you might not realize. One of the most critical factors shaping your fixed mortgage renewal rate is government bond yields.
These yields quietly influence how much it costs banks to lend you money. As bond yields rise or fall, fixed mortgage rates often move in lockstep, which can impact your budget and long-term plans.
Key Takeaways
- Bond yields serve as the primary reference point for lenders when setting fixed rates.
- Lenders are more likely to increase fixed rates faster when bond yields increase and are slower to decrease.
- Recent fluctuations in bond yields mean renewal rates may shift quickly without much notice.
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How Bond Yields Impact the Mortgage Market
Bond yields serve as a benchmark for fixed mortgage rates. As bond yields decrease, borrowing costs decrease for lenders, enabling them to offer borrowers lower fixed mortgage rates. The relationship between bond yields and mortgage rates can be compared between those with the same terms. For example, a 5-year bond yield will directly impact the borrowing costs of 5-year fixed rates, and a 3-year bond yield will directly impact the borrowing costs of 3-year fixed rates.
When bond yields increase, mortgage rates tend to respond quickly and rise in response. However, when bond yields decline, mortgage rates may not align perfectly with the drop in bond yields. Lenders and mortgage providers will likely maintain risk premiums in their pricing to mitigate potential economic changes. This cautious approach could limit the extent of rate drops, ensuring that lenders are adequately protected in the event of any adverse market conditions where bond yields rise once again.
Why Bond Yields Matter for Fixed Rate Renewals
Bond yields are the foundation beneath your mortgage rate, providing the base cost that lenders build on. A bond yield represents the return an investor earns for holding a government bond over a set period, such as 5 years. In Canada, lenders closely monitor Government of Canada bond yields, as they align with the most popular fixed mortgage term.
When you take out or renew a fixed mortgage, your lender needs to fund that money, usually by raising capital in the bond markets. If it costs them more to borrow over five years because yields are higher, they pass that cost on to you through a higher mortgage rate when you choose a 5-year fixed rate.
How Bond Yields Affect Your Renewal Rate
Fixed mortgage renewals are directly tied to market movements in bonds, which can shift rapidly in response to economic news, inflation data, or changes in investor expectations.
For example, if the 5-year bond yield rises by half a percentage point over several weeks, lenders typically adjust their posted and discretionary 5-year fixed rates by a similar margin. This means that someone renewing today could face very different rates than a borrower who renewed in January, even with the same lender and term length.
Example
If your renewal is approaching, and in the two months before you lock in your rate, the 5-year bond yield jumps from 3% to 3.6%. Your lender may increase its 5-year fixed rate by a similar margin to account for higher funding costs. This seemingly small change has a significant impact over time, as any increase in rates means more interest is paid during the same five-year term.
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Timing Your Renewal Based on Yield Trends
When you’re within 120 to 150 days of your renewal date, it’s a good time to start monitoring bond yields and mortgage rates forecast to plan your next steps.
Some lenders offer early renewal or rate holds, allowing you to lock in today’s rate before your current term ends. This can be valuable when yields are trending upward, as it helps you avoid higher rates if market conditions persist.
Before deciding whether to lock in early, consider a few factors carefully:
- Expected rate movements: If most economists expect yields to rise, acting sooner could save you money.
- Your future plans: If you plan to sell the home within a year or two, a shorter mortgage term at renewal may be more flexible.
- Your current rate: If your current interest rate is lower than the renewal rate, it may be beneficial to wait instead of early renewing or consider a rate hold, which allows you to maintain your current rate until closer to the end of your term, if your lender allows.
Pros of locking in early:
- Peace of mind knowing your rate is secured.
- Protection against sudden market volatility.
- Easier budgeting with a confirmed payment amount.
Cons of locking in early:
- You could miss out on lower rates if yields unexpectedly decline.
- Locking in early reduces your flexibility since you’re committing to new terms sooner.
- You might feel pressure to finalize your decision quickly without comparing all your options, especially if rates appear volatile.
Strategies to Manage Rate Uncertainty
There are several strategies to help protect you from surprises if you’re facing renewal when bond yields are unpredictable. Before making a decision, take some time to compare the following options and consider how each one might align with your financial plans.
While no one can predict the future perfectly, taking a proactive approach helps you avoid scrambling at the last minute and positions you to secure the best rate available.
- Early Renewal or Rate Hold: If your lender allows you to lock in a rate early, you can secure today’s rates. This strategy helps avoid further increases if yields continue to climb.
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Shorter Fixed Terms: Committing to a shorter fixed term, such as 1 or 3 years, may provide more flexibility if you anticipate rates will improve soon.
Shopping Around: Renewal offers aren’t always competitive. Comparing rates from different lenders can help you find a better deal. - Stress Test Your Budget: Use an online mortgage payment calculator to test your payments under different rate scenarios. For example, see how an extra 0.5% or 1% increase in rates could affect your monthly payment.
Frequently Asked Questions (FAQ) About How Bond Yields Affect Fixed Mortgage Rates
What are Canadian bond yields?
Bond yields are the interest returns that investors receive when they lend money to the Government of Canada over a set period. The 5-year Government of Canada bond yield is particularly important because it affects the cost for lenders to fund 5-year fixed mortgages and is often used to gauge the state of the Canadian economy. However, as Canada’s economy is closely linked to the US economy, 10-year US treasuries have an indirect impact on 5-year Canadian bonds.
How do I track bond yields before renewing my mortgage?
You can visit the Bank of Canada’s website, which publishes daily data on bond yields across different terms. Many financial news outlets also provide regular updates summarizing yield trends and their impact on mortgage rates.
Should I lock in my renewal rate early if yields are rising?
If you’re nearing renewal and yields are rising, locking in early could save you money. Many lenders allow you to secure a rate up to 120 or 150 days before your renewal date without prepayment penalties, which helps protect you from further rate increases.
What’s the difference between variable and fixed rates when it comes to bond yields?
Fixed mortgage rates are closely linked to bond yields because lenders use bonds to fund fixed-rate products. Variable rates are closely tied to the Bank of Canada’s overnight rate, which is adjusted several times a year in response to economic conditions.
Why did my lender’s renewal rate increase when the Bank of Canada didn’t change rates?
Bond yields can rise even when the central bank holds rates steady. For example, if investors expect inflation to remain high or anticipate economic risks, yields can rise, which pushes fixed mortgage rates higher, regardless of the Bank’s policy decisions.
Final Thoughts
Understanding how bond yields affect your fixed mortgage renewal gives you an edge when planning your next steps. As a borrower, while yields remain volatile, it’s more important than ever to pay attention to market trends and economic indicators and explore all your options so you can act early if it makes sense.
If you’d like help comparing renewal offers or planning your mortgage strategy that fits your long-term goals, contact a nesto mortgage expert today.
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