13 Apr

Bank of Canada Increased Overnight Rate by +0.50% → Still below 2019 rates

General

Posted by: Adam Sale

Bank of Canada Increases Overnight Interest Rate

Where’s the best deal? Where do we go from here?

Bank of Canada Increases Rates by 0.50% → Still lower than 2019 rates – Watch Video

Bank of Canada increased their overnight lending rate to 1.00%, this is still 0.75% lower than pre-pandemic levels.

This rate hike will increase the lenders’ Prime rate from 2.70% to 3.20%. The pre-pandemic Prime-Interest rate was 3.95%.

Even with the future anticipated rate hikes, the variable rate mortgage is still an excellent deal when compared with the current fixed rate mortgages. Some lenders are still offering variable rate mortgages @ Prime – 1.00% (3.2% – 1.00% = 2.20%)

For those clients wanting a great mortgage rate as well as a fixed payment there are options available with a shorter term (2 & 3-year) fixed-rate mortgage, or consider a Capped Variable Rate Mortgage.

Fixed-rates reclaimed pre-pandemic levels last week and are finally showing the first signs of resistance from raising higher.

It is worth noting that the Bank of Canada’s goal is to reach an average inflation target of 2% over a 5-year period. It is possible we will see one more aggressive rate hike in the near future, but I am anticipating the bank will wait to see the affects these rate hikes have on the economy. It takes 3-6 months for the economy to absorb a Bank of Canada rate hike.

I am available for any financing and strategy questions.

Best,
Adam Sale Mortgages
778-215-4121

8 Apr

What are Government Bonds? How do Bonds affect Mortgage Rates?

General

Posted by: Adam Sale

What are Government Bonds?

Government bonds are essentially I.O.U’s issued by the government to fund their public programs. These I.O.U’s provide a great option for investors with excess cash looking for a safe place to park their money to generate a return on their investment (rate-of-return). Because bonds are backed by the Canadian government and the government has never defaulted on their debt, these bonds are considered to be risk-free.

  • A bond is sold in various durations, from 1-year up to 30-years.
  • The rate-of-return a bond provides is called the bond’s yield.
  • The bond’s yield is determined by two components: the bond’s price, and the bond’s coupon rate.

The bond’s price is the amount an investor will pay for the bond, and the coupon rate is the amount of interest the bond will pay the investor annually. When you account for the bond’s price and the coupon rate, we have the rate-of-return the bond provides, also known as the bond’s yield.

When inflation is higher than the bond’s yield, a smart investor will not purchase the bond because they understand their money’s purchasing power is decreasing with this investment.

For a bond to be competitive in a high inflation market, the bond yield needs to exceed the rate of inflation. To achieve this, the bond’s price needs to decrease, or the bond’s coupon rate needs to increase, or both.

How do Government Bonds affect Mortgage Rates?

Over the last 6-months (November 2022 – April 2022) we’ve noticed inflation exceeding Bank of Canada’s average target inflation rate of 2%. The bond market is reacting accordingly and bond prices are dropping which is causing bond yields to increase. Since fixed mortgage rates are positively correlated with bond yields, any increase to bond yields means an increase to fixed mortgage rates.

Links to Current Bond Yields